FOULKES v Revenue & Customs (INCOME TAX - pension transfer)

Factual and Procedural Background

In 2017, the Appellant held a pension fund with a local government pension scheme valued at £18,309. He transferred this fund to an approved pension scheme administered by Company B. Shortly thereafter, the Appellant received a loan of £13,040 (less fees and interest) from a third-party lender, Company A. HM Revenue and Customs ("HMRC") initially treated the entire pension transfer as an unauthorised member payment under Part 4 Finance Act 2004 ("FA 2004") and assessed tax charges totaling £10,069. HMRC later focused on the loan amount as the unauthorised payment, asserting a liability of £7,172 in charges.

The Appellant disputed that the loan constituted an unauthorised member payment and alternatively argued that it was not just and reasonable for him to be liable for the unauthorised payments surcharge. The matter was appealed to the First-tier Tribunal (Tax Chamber), where evidence was heard, including documentary submissions and witness testimony from the Appellant. The Tribunal considered the legal framework for authorised and unauthorised payments from pension schemes, the facts surrounding the pension transfer, the loan arrangement, and the connection between the pension investment and the loan.

The appeal arose from a closure notice issued by HMRC following an enquiry into the Appellant's 2017-18 tax return. The Appellant also appealed HMRC's refusal to discharge the unauthorised payments surcharge on grounds of it not being just and reasonable to impose it.

Legal Issues Presented

1. Whether the loan amount of £13,040 constituted an unauthorised member payment under Part 4 FA 2004.
2. If the loan was an unauthorised member payment, whether it was just and reasonable for the Appellant to be liable to the unauthorised payments surcharge.

Arguments of the Parties

Appellant's Arguments

• The Appellant contended that the loan was not an unauthorised member payment.
• He argued alternatively that it was not just and reasonable for him to be liable for the surcharge, emphasizing that he was unaware of any connection between the loan and the pension investment.
• The Appellant maintained that he genuinely believed the loan was a separate, authorised transaction and not connected to the pension fund.
• He also argued that the surcharge was punitive and exceeded the tax relief benefits he had obtained from his pension contributions.

Respondents' Arguments

• HMRC asserted that the loan from Company A was an unauthorised member payment because it was causally linked to the pension scheme's investment in a company (referred to as Haimachek).
• They relied on the legal framework in Part 4 FA 2004 and the Upper Tribunal decision in Danvers v HM Revenue & Customs to establish that a loan connected to a pension investment falls within the scope of unauthorised payments.
• HMRC accepted that the original closure notice overcharged the Appellant by basing charges on the full pension transfer rather than the loan amount, and accordingly reduced the charge.
• HMRC opposed the discharge of the surcharge, submitting that the statutory scheme and deterrent purpose justified the surcharge despite the Appellant's lack of knowledge of the connection.

Table of Precedents Cited

Court's Reasoning and Analysis

The Tribunal examined whether the loan received by the Appellant was an unauthorised member payment under Part 4 FA 2004. It focused on the definition of unauthorised member payments as payments not authorised by section 164 FA 2004 and the concept of payments made "from sums or assets held for the purposes of the scheme" under section 279(2). Section 161(3) FA 2004 extends this to payments or benefits made "in connection with" investments acquired using scheme assets, even if the scheme assets remain intact.

Relying heavily on the Upper Tribunal's decision in Danvers, the Tribunal held that a causal link between the loan and the pension scheme's investment in Haimachek was sufficient to treat the loan as an unauthorised member payment. The Tribunal found that although the loan agreement did not expressly condition the loan on the pension investment, the facts showed a sufficient connection: the loan and investment were first discussed at the same meeting; the loan funds were advanced after pension investment instructions but before signing the loan agreement; the loan agreement referenced an account connected to the pension investment promoter; and the loan payment came from an entity linked to the pension investment.

The Tribunal rejected the Appellant’s argument that the payment was authorised under section 164(1)(f) FA 2004 and the associated regulations concerning payments made in error. It found that the loan was not intended to be a pension benefit payment and thus did not fall within the authorised payments regime.

Regarding the unauthorised payments surcharge, the Tribunal applied the principles from Bella Figura and O'Mara, which require a holistic assessment of whether it is just and reasonable to impose the surcharge, without needing to find negligence or dishonesty. The Tribunal accepted that the Appellant was unaware and could not reasonably have known of the connection between the loan and pension investment but noted that this was not determinative. It considered the Appellant’s professional advice, the indemnity signed denying loans related to the transfer, the significant portion of the pension fund involved, and the statutory purpose of the surcharge as a deterrent.

Overall, the Tribunal concluded that the surcharge liability was just and reasonable and declined to discharge it. However, it allowed the appeal in part by reducing the charge and surcharge amounts to correspond to the loan amount rather than the full pension transfer.

Holding and Implications

The Tribunal allowed the appeal in part, reducing the unauthorised payments charge to £5,216 and the unauthorised payments surcharge to £1,956, making a total charge of £7,172.

The Tribunal held that the loan from the third-party lender was an unauthorised member payment under Part 4 FA 2004 due to its causal link with the pension scheme’s investment. The Appellant was liable for the unauthorised payments charge and surcharge. The application to discharge the surcharge on the basis that it was not just and reasonable was refused.

The decision directly affects the parties by adjusting the tax charges and confirming surcharge liability. It does not establish new legal precedent but applies and clarifies existing principles regarding the scope of unauthorised payments and the assessment of surcharge liability under the statutory scheme.