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Markel Tax

26 May 2020

Pension contributions: tax relief or not?

On 12 May, in HMRC v Sippchoice Ltd [2020] UKUT 0149 (TCC), the Upper Tribunal held that in specie contributions to a pension scheme did not attract income tax relief, and that only cash contributions to a pension scheme can attract such relief. This affects retirement planning for individuals holding assets other than cash, who will have to convert these assets into cash before contributing to the pension if they want income tax relief. However, doing so could potentially create another tax charge which could wipe out some or all of the benefit of the income tax relief. 

The case concerned four individuals who had set up Self Invested Personal Pensions (SIPPs) with Sippchoice Ltd, contributing shares to their respective schemes. The company claimed income tax relief under section 188 Finance Act 2004 (FA2004). HMRC denied relief on the basis the contributions to a scheme should be cash-based, despite their own guidance in the Pensions Tax Manual at PTM042100 (the Manual) indicating that it may be possible to claim income tax relief on non-cash contributions. 

When Sippchoice Ltd appealed HMRC’s decision to deny income tax relief, the First Tier Tribunal held that the definition of ‘contributions paid’ - the language used in FA2004 - was sufficiently wide to encompass monetary and non-monetary contributions. HMRC were given leave to appeal the decision to the Upper Tribunal.

HMRC’s argument before the Upper Tribunal was that later sections of FA2004 referred to specific types of shares (those acquired via SAYE option schemes and share incentive plans) attracting income tax relief, if contributed within 90 days of acquisition. On this basis, why would relief on these shares be restricted to 90 days and yet relief would be available on any other share, no matter how long it had been held before being contributed to the pension? As such, ‘contributions paid’ had to refer to a monetary contribution, not contributions of other assets.

Sippchoice Ltd argued that the shares were transferred into the SIPPs to satisfy a pre-existing debt, created when the individual undertook to pay a certain sum into the scheme.  The basis of this argument was the Manual, which states that contributions to a pension scheme must be monetary amounts, but that a member can agree to pay a monetary amount and satisfy this debt by way of transfer of assets to the scheme.

The Upper Tribunal agreed with HMRC’s argument, and held that in the context of FA2004, ‘contributions paid’ must mean a monetary contribution only. They also agreed with the contention by HMRC that the Manual was only an interpretation of the law, meant for guidance, and not the law itself, regardless of whether the manual was clear or disagreed with the legislation.

Sippchoice Ltd have been given leave to appeal this decision.

This decision will affect people who have been relying on the Manual to transfer shares (or any other assets) into their personal pensions, and they will have to review their retirement planning as a result. As the judgement is based on construction of the legislation rather than specific facts, it is clear that this is likely to affect all pension providers, not just Sippchoice Ltd. Providers will need to consider how they structure their wording and offerings going forward.

One other point to note is that, although HMRC acknowledged that their guidance was unclear, there was a lack of weight given to the guidance in this case by the Tribunal. The contention was that the guidance had no impact, because if the guidance and legislation do not have the same meaning, the legislation takes precedence. Sippchoice Ltd did not try to argue that it had relied specifically on the Manual. However, given previous decisions by the Courts, whereby taxpayers were successfully able to rely on HMRC guidance, it would have been interesting to see if this argument could have changed the outcome here.

Whilst it may not be possible to attract income tax relief on in specie contributions to pension schemes going forward (subject to any appeal in this case), we can assist with reviewing the position to assist with tax-efficient wealth and retirement planning. 

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