Allan v Revenue & Customs

Factual and Procedural Background

This appeal arises from a decision of the First-tier Tribunal ("FTT") dated 12 February 2013 to strike out the Appellant's appeal against a discovery assessment under Rule 8(3)(c) of the Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009. The assessment, amended in 2010, was for £193,661, resulting in an additional tax liability of £77,464.53 on the Appellant. The assessment was made pursuant to section 386 of the Income Tax (Earnings and Pensions) Act 2003 ("s.386 ITEPA") concerning an employer's contribution of assets to a retirement benefits scheme on behalf of the Appellant during the 2004/2005 tax year. The contribution consisted of non-cash assets (Treasury stock) transferred by the Appellant's employer ("the Employer"), a company of which the Appellant was a shareholder and director, to an unapproved pension scheme ("the Scheme") established in 2002. The Appellant was a trustee and member of the Scheme. The Employer deducted the contribution value from its taxable income, but the Appellant did not include this contribution in his tax return, contending it was not taxable under s.386 ITEPA as it was not "a sum paid" in cash. The Court of Appeal's decision in Irving v HMRC [2008] EWCA Civ 6, however, held that such a contribution of non-cash assets constitutes "a sum paid" for tax purposes.

The FTT struck out the appeal on the basis that it had no real prospect of success, and permission to appeal to the Upper Tribunal was granted on 8 August 2013.

Legal Issues Presented

1. Whether section 386 ITEPA applies to employer contributions to unapproved pension schemes made in the form of non-cash assets.
2. Whether section 386 ITEPA should be construed as inapplicable to such non-cash contributions due to the rule of construction in section 3 of the Human Rights Act 1998 ("s.3 HRA") to avoid infringement of Article 1 of Protocol 1 ("A1P1") to the European Convention on Human Rights.
3. Whether the Court of Appeal's decision in Irving v HMRC was per incuriam for failing to consider s.3 HRA and A1P1.
4. Whether the First-tier Tribunal was entitled to strike out the appeal under Rule 8(3)(c) of the Tribunal Procedure Rules on the basis that the appeal had no reasonable prospect of success.

Arguments of the Parties

Appellant's Arguments

• The FTT erred in striking out the appeal as there was a reasonable prospect of ultimate success in the Court of Appeal or Supreme Court, particularly on the basis that the Court of Appeal in Irving did not consider s.3 HRA or A1P1.
• Section 386 ITEPA should be interpreted so that contributions in the form of non-cash assets do not constitute "a sum paid" and thus are not taxable as employment income.
• The Court of Appeal's wider construction in Irving was incorrect and should be reconsidered as it was decided per incuriam.
• The tax charge under s.386 ITEPA is disproportionate and penal because it taxes the employee on a contingent right without actual receipt of income, potentially confiscatory and infringing A1P1 rights.
• S.3 HRA requires courts to adopt a Convention-compliant interpretation of legislation where possible, which would exclude non-cash contributions from taxable sums.
• The FTT should have exercised its discretion under Rule 8(3)(c) to allow the appeal to proceed given the human rights issues raised.

Respondents' Arguments

• The FTT was correct to strike out the appeal as the Appellant's case lacked merit and had no real prospect of success, even if taken to the Supreme Court.
• The Court of Appeal's decision in Irving is binding and correctly interpreted s.386 ITEPA to include non-cash asset contributions.
• The tax legislation is not arbitrary, retrospective, or discriminatory and falls within the wide margin of appreciation accorded to states in taxation matters under A1P1.
• There are statutory relief provisions (e.g., s.392 ITEPA) and exemptions (e.g., s.396 ITEPA) that mitigate any unfairness or double taxation concerns.
• If the Upper Tribunal found any merit in the arguments, the matter should be remitted to the FTT for a full hearing rather than allowing the appeal to proceed directly.

Table of Precedents Cited

Court's Reasoning and Analysis

The Court began by acknowledging that the First-tier Tribunal's decision to strike out the appeal was based on the conclusion that the appeal had no real prospect of success, applying Rule 8(3)(c) of the Tribunal Procedure Rules. The Court confirmed that the binding precedent established by the Court of Appeal in Irving v HMRC dictates that employer contributions in the form of non-cash assets to unapproved pension schemes constitute "a sum paid" and are taxable under s.386 ITEPA. The Appellant's argument that s.3 HRA requires a Convention-compliant interpretation excluding such contributions was rejected as untenable. The Court found that the distinction between cash and non-cash contributions would be arbitrary, irrational, and absurd, and thus unlikely to be a "possible" interpretation within the meaning of s.3 HRA.

Regarding the proportionality challenge under Article 1 of Protocol 1 (A1P1), the Court applied established principles that taxation measures engage A1P1 but enjoy a wide margin of appreciation by the state. The Court reviewed case law demonstrating that only extreme, arbitrary, discriminatory, or retrospective tax measures lacking reasonable foundation would violate A1P1. The present legislation was found to be of general application, non-discriminatory, and accompanied by relief provisions mitigating any unfairness. The contingent nature of pension rights and potential double taxation concerns did not remove the legislation from within the margin of appreciation.

The Court also noted that the Appellant was a director and shareholder of the Employer, was aware of the tax implications at the time of contribution, and voluntarily participated in the Scheme, reinforcing the reasonableness of the tax treatment. The Court concluded that the FTT correctly assessed the merits and was entitled to strike out the appeal.

The argument that the Irving decision was per incuriam for failing to consider s.3 HRA and A1P1 was not pursued further, as it depended on the success of the primary arguments which were rejected.

Holding and Implications

The Upper Tribunal UPHELD the decision of the First-tier Tribunal to strike out the appeal under Rule 8(3)(c) of the Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009 on the basis that the appeal had no real prospect of success.

The direct effect is that the Appellant's challenge to the discovery assessment under s.386 ITEPA on the basis that non-cash employer contributions should not be taxable is dismissed. The Court reaffirmed the binding nature of the Court of Appeal's decision in Irving v HMRC and confirmed that neither s.3 HRA nor A1P1 requires a different interpretation. No new precedent was established, and the wide margin of appreciation accorded to the legislature in tax matters was emphasized. The ruling reinforces the established tax treatment of non-cash contributions to unapproved pension schemes and limits the circumstances in which human rights arguments may alter statutory interpretation in this context.