Cash is King: HMRC v Sippchoice Limited
Locations
The Upper Tribunal Tax and Chancery Chamber decided on 12 May 2020 in HMRC v Sippchoice Limited that only a cash contribution to a registered pension scheme will attract tax relief, and not a contribution made by way of assets (known as a contribution "in specie"). This is subject only to the limited exceptions that are specified in the Finance Act 2004 relating to contributions of shares to which an SAYE option plan or share incentive plan applies.
The significance of this ruling lies in the fact that, until HMRC changed its practice in this respect four years ago, it was common practice for contributions of assets to be made to small self-administered schemes (SSASs) and self-invested personal pensions (SIPPs) where an obligation to pay a cash contribution was first created and then satisfied by the contribution of an asset. This was in accordance with HMRC's published guidance. The kinds of assets which were contributed were typically commercial property or shares, which such a scheme may properly hold without incurring an unauthorised payments tax charge, and to which a market value may be attributed by an independent professional valuer.
Such a contribution in specie would be structured by way of two separate agreements. Under the first agreement, usually by deed, the member or the sponsoring employer would assume an obligation to pay a contribution of a specified monetary amount. The obligation to pay that amount would be a debt legally recoverable by the trustees of the scheme from the member or employer. If the agreement was by deed, this would be the case without the need for any consideration being given in return to the member or employer. Under the second agreement, the member or employer would transfer an asset to the trustees of the scheme in satisfaction of the obligation under the first agreement. This process is specifically contemplated and accepted in HMRC's published Pensions Tax Manual.
Under the Upper Tribunal's judgment, such contributions of assets will no longer attract tax relief. Members of SSASs and SIPPs, including typically company directors and owners of small businesses, or sponsoring employers of SSASs as occupational pension schemes, who do not have the available cash to make contributions in monetary form, may no longer make contributions to their schemes using assets. Furthermore, HMRC has given no assurance that it would not seek to recover back tax relief given in the past in respect of contributions in specie.
The Court's decision was based on its interpretation of the statute, the Finance Act 2004. Section 188 of that Act provides for income tax relief on member contributions paid to a registered pension scheme. Section 195 provides for such income tax relief to apply to a transfer of shares, but only where the member has acquired the shares under an SAYE option scheme or a share incentive plan and transfers those shares to the scheme within 90 days of so acquiring them. The Court held that such share transfers were the only instance of a contribution of assets which could attract income tax relief. The Court decided that, subject to the limited exception in section 195, no contribution in asset form will attract tax relief, by whatever mechanism that contribution is made. The Court held that it made no difference, where this exception does not apply, that the contribution of assets is made in satisfaction of a pre-existing obligation to make a cash contribution.
The Sippchoice case was concerned on its facts with income tax relief for member contributions to a registered pension scheme under section 188 of the Finance Act 2004. However, the scope of the ruling is sufficiently wide to apply also to the deduction from profits for corporation tax purposes of employer contributions to a SSAS under section 196 of the Finance Act 2004. The same expression "contributions paid", which is at the heart of this case, is used in section 196 as in section 188, and there is no such exception as in section 195 for employer contributions in relation to any transfer of assets. Following the Sippchoice decision, cash contributions by an employer company to a SSAS are deductible in computing the company's profits for corporation tax purposes, but an employer contribution in assets would not be so deductible.
It should be noted that the Court's decision in Sippchoice contradicts HMRC's Pensions Tax Manual on the availability of tax relief for contributions in specie and effectively finds that HMRC's published guidance is incorrect. A key point in the Court's decision is that savers and schemes should comply with statute rather than with the Pensions Tax Manual. The Court observed that that manual is internal guidance for HMRC staff and is not a statement of law. However, it is reasonable in my view for savers and schemes to have regard to it, as at least an indication of how HMRC will apply the legislation, and it would seem to be inappropriate for HMRC to claim back tax relief retrospectively, which was given in accordance with its own published guidance.