Imposition of Unauthorised Payments Surcharge on Pension Scheme Misuse: O'Mara v. Revenue and Customs [2017] UKFTT 91 (TC)

Introduction

The case of O'Mara v. Revenue and Customs ([2017] UKFTT 91 (TC)) deals with the imposition of unauthorised payments surcharges under the Finance Act 2004 on pension scheme members. The appellants, Rory and Charlotte O'Mara, directors of Biz-Works UK Ltd, entered into a scheme known as the Bespoke Pension Trust (BPT), facilitated by James Lau of Wightman Fletcher McCabe Ltd (WFM). This arrangement purportedly allowed them to transfer pension funds into a trust to provide working capital for their business. However, HM Revenue and Customs (HMRC) levied unauthorised payment charges and surcharges on these transactions, leading the appellants to appeal the refusal to discharge these surcharges.

Summary of the Judgment

The First-tier Tribunal (Tax Chamber) reviewed the appellants' appeal against HMRC's decision to impose a 15% unauthorised payment surcharge, in addition to a 40% unauthorised payments charge, totaling 55% of the unauthorised payments derived from their pension funds. The appellants contended that they were misled by a regulated adviser and genuinely believed the scheme was compliant with HMRC regulations. They argued that the surcharge was excessive and disproportionate.

After thorough examination, the Tribunal dismissed the appeals, upholding HMRC's decision. The Tribunal concluded that the surcharge was just and reasonable, emphasizing that the appellants had not exercised sufficient due diligence and had knowingly participated in a scheme designed to circumvent pension fund regulations. The Tribunal reaffirmed the robustness of the Finance Act 2004 provisions in safeguarding pension schemes from unauthorised payments.

Analysis

Precedents Cited

The Tribunal referenced several key cases to substantiate its decision:

Stephen Willey v HMRC [2013] UKFTT 328 (TC): Clarified that the unauthorised payments charge and surcharge are intended to recoup tax relief rather than act as punitive penalties.
Peter Browne v HMRC [2016] UKFTT 595 (TC): Highlighted that the purpose of the surcharge is to prevent the abuse of pension schemes and ensure tax relief benefits accrue appropriately.
Herefordshire Property Company Ltd v HMRC [2015] UKFTT 79: Established the criteria for assessing negligence in similar unauthorised payment cases.

Legal Reasoning

The Tribunal's decision hinged on several legal provisions within the Finance Act 2004:

Section 160 & 164: Define what constitutes authorised and unauthorised payments from pension schemes.
Section 208: Imposes a 40% charge on unauthorised member payments.
Section 209: Introduces an additional 15% surcharge when unauthorised payments exceed 25% of the pension fund value.
Sections 268 & 269: Provide the framework for appealing the surcharge charge if it is not just and reasonable.

The Tribunal analyzed the appellants' conduct, noting their reliance on a regulated adviser who failed to provide adequate documentation and assurances of compliance. Despite initial concerns about the high returns promised by the FX trading component of the scheme, the appellants proceeded without seeking independent legal or financial advice. Their actions were deemed insufficiently prudent, particularly given their professional background in lending.

Impact

This judgment underscores the strict enforcement of pension fund regulations and the significant financial repercussions of unauthorised payments. It serves as a deterrent against schemes that aim to exploit pension funds for commercial benefits outside the established legal framework. Additionally, it highlights the importance for pension scheme members to exercise due diligence and seek independent advice when engaging in complex financial arrangements.

Complex Concepts Simplified

Unauthorised Member Payments

Under the Finance Act 2004, pension schemes are limited to making specific types of payments to their members. Any payment outside these types is considered "unauthorised." In this case, the loans made by the appellants' company to themselves were not recognized as legitimate pension scheme payments.

Unauthorised Payments Charge and Surcharge

Unauthorised Payments Charge (40%): A tax charge levied on the recipient of an unauthorised payment to recover some of the tax relief previously granted on pension contributions.
Unauthorised Payments Surcharge (15%): An additional tax charge imposed when the unauthorised payment exceeds 25% of the pension fund's value, addressing the significant misuse of pension funds.

Bespoke Pension Trust (BPT)

A BPT refers to a tailored pension arrangement designed to allow greater flexibility in how pension funds are invested and accessed. However, such schemes must comply rigorously with HMRC regulations to ensure they do not constitute unauthorised payments.

Conclusion

The decision in O'Mara v. Revenue and Customs reinforces the stringent application of pension fund regulations outlined in the Finance Act 2004. By dismissing the appellants' appeal, the Tribunal underscored the necessity for pension scheme members to engage in lawful and transparent financial activities. The ruling serves as a crucial reminder of the potential consequences of unauthorised pension fund manipulations and the importance of due diligence and independent advisory in complex financial arrangements.

Moving forward, pension scheme members and advisers must ensure full compliance with HMRC regulations to avoid similar punitive measures. This case also highlights the judiciary's role in upholding the integrity of pension regulations, thereby safeguarding the intended purpose of pension funds for retirement benefits.