Introduction

Willey v. Revenue & Customs ([2013] UKFTT 328 (TC)) is a pivotal case adjudicated by the First-tier Tribunal (Tax) on June 3, 2013. The appellant, Stephen Charles Willey, acted as the scheme administrator for the Hesco Military Products Limited Directors Pension Scheme (hereafter referred to as "the Scheme"). The crux of the dispute centered around an unauthorized employer payment made by the Scheme to Mr. Rory Fordyce, one of its members and directors. This unauthorized transaction triggered sanctions under the Finance Act 2004 (FA 2004), specifically leading to the imposition of a scheme sanction charge. The case delves into the obligations of scheme administrators, the scope of unauthorized payments, and the thresholds for discharging liability under FA 2004.

Summary of the Judgment

The appellant contested the decision of HM Revenue & Customs (HMRC) to impose a scheme sanction charge of £15,000, arising from an unauthorized employer payment of £100,000. The pivotal points of contention included whether the appellant could reasonably believe the payment was authorized and whether the sanction charge was just and reasonable under section 268 FA 2004.

The Tribunal meticulously examined the statutory framework of FA 2004, highlighting the stringent requirements for authorized payments and the consequences of deviations. It was established that the payment made by the Scheme did not comply with the criteria set forth in sections 175 and 179 FA 2004, primarily due to the absence of adequate security and non-compliance with prescribed repayment terms.

The appellant argued for relief under section 268, citing unfamiliarity with the new regime post-A-day, incomplete HMRC guidance, proactive steps taken upon discovering the unauthorized payment, and the eventual repayment of the loan without any loss to the Scheme. Additionally, he contended that the sanction charge infringed upon his rights under the European Convention on Human Rights (ECHR).

The Tribunal ultimately dismissed the appeal, asserting that the appellant failed to establish a reasonable belief that the payment was authorized and did not mitigate the lack of adequate systems to prevent such unauthorized transactions. Furthermore, the arguments related to ECHR rights were deemed insufficient to override the statutory obligations under FA 2004.

Analysis

Precedents Cited

The Tribunal referenced several precedents to contextualize its decision. Notably, it drew upon HM Revenue & Customs v Total Technology Limited [2012] UKUT 418 (TCC) and Bosher v HM Revenue & Customs [2012] UKFTT 631 (TC). These cases provided a foundation for understanding the scope of penalties and the circumstances under which they may be deemed disproportionate or lacking reasonable foundation.

In Total Technology Limited, the Upper Tribunal examined the default surcharge regime related to VAT, establishing criteria for when penalties might contravene ECHR rights, particularly focusing on proportionality and reasonable foundation. Similarly, Bosher dealt with fixed penalties under section 100B TMA 1970, reinforcing the notion that penalties must not be disproportionate to the aims they seek to achieve.

These precedents reinforced the Tribunal's stance that financial penalties must align with statutory objectives and that discretionary relief should be granted only under stringent conditions, aligning with the appellant's inability to meet these criteria.

Legal Reasoning

The Tribunal's legal reasoning centered on the interpretation and application of FA 2004, particularly sections 175, 179, 208, 239, 240, and 268. The judgment underscored the prescriptive nature of FA 2004 in regulating authorized and unauthorized payments within pension schemes to safeguard tax reliefs and ensure they are exclusively utilized for genuine retirement benefits.

A critical aspect was the definition and implications of an unauthorized employer payment. The Scheme's £100,000 loan to the Company was deemed unauthorized due to non-compliance with section 179's stringent requirements, including the absence of a fixed term, insufficient interest rates, and lack of collateral security.

Regarding relief under section 268, the Tribunal analyzed the dual criteria: whether the scheme administrator reasonably believed the payment was authorized and whether imposing the sanction charge was just and reasonable. The appellant failed to demonstrate a reasonable belief, primarily due to inadequate systems to detect such unauthorized transactions. Additionally, the Tribunal found the sanction charge proportionate and necessary to maintain the integrity of the pension scheme's tax-relief provisions.

The appellant's ECHR arguments were meticulously addressed. The Tribunal acknowledged the broad discretion granted to the state in tax matters but emphasized that the sanction charge did not breach proportionality or reasonable foundation requirements under the ECHR, aligning with established legal standards.

Impact

This judgment reinforces the stringent responsibilities placed upon scheme administrators under FA 2004. It underscores the necessity for robust internal controls and systems to prevent unauthorized transactions and ensures strict adherence to authorized payment protocols. The decision serves as a cautionary exemplar for scheme administrators to cultivate comprehensive oversight mechanisms to mitigate liability risks.

Furthermore, the Tribunal's handling of ECHR considerations within the context of tax penalties delineates the boundaries of human rights protections in financial regulatory frameworks. It affirms that while human rights are integral, statutory obligations in tax law possess primacy when they are duly legislated and proportionately applied.

For future cases, this judgment clarifies that mere post-facto corrective actions and the absence of financial loss do not absolve scheme administrators from liability if unauthorized payments occur. It also signifies that arguments based on rights under the ECHR must demonstrate substantive breaches beyond standardized legislative penalties to be persuasive.

Complex Concepts Simplified

Conclusion