Mohassan Mehmood: The implications of the Sippchoice v HMRC case

It's been a long-standing dispute over the tax treatment of transferring non-cash assets into pension schemes.

Let's rewind to 2018. Sippchoice Limited was successful at the First-tier Tribunal in challenging HMRC's contention that ‘in-specie contributions' - non-cash assets such as commercial property and shares transferred into pension schemes - should not receive tax relief like their cash counterparts. Pension administrators were given the all-clear that their interpretation of HMRC's own guidance on in-specie contributions was indeed correct.

Fast-forward to May 2020 and the decision has been flipped on its head. HMRC has won its appeal against the original decision and, instead, the Upper Tribunal has ruled that tax relief is only applicable on pension contributions made in cash, and not for any non-monetary contributions.

HMRC's Pensions Tax Manual has been regarded for many years as the ‘Holy Grail' within the industry - indeed the Manual specifically stated that transactions could be structured using ‘in-specie' transactions which would seem to suggest that this was approved by HMRC for tax relief purposes. However, the Upper Tax Tribunal has held that the Manual is "unclear" on this point and, in any event, it must be read simply as HMRC's internal guidance and one that doesn't carry the force of the law.

The focus of this case has very much been on the minutia of wording - what does the definition of ‘contributions paid' actually mean in section 188(1) of the Finance Act 2004? According to the Upper Tax Tribunal, its meaning is limited only to monetary contributions.

We're all waiting to see what the next move will be. Will the Court of Appeal play a role in this drawn-out saga, or will pension administrators, and clients alike, have to face the consequences of the latest ruling?

It remains to be seen. If an appeal is granted and goes ahead, a final decision could take years. In the meantime, the industry cannot be left in limbo waiting for the justice cog to turn. It must make provisions now and act decisively to protect itself against any potential fall-out.

We held a recent webinar on this very issue and the clear and overriding concern that came out of it was the wider issue of the reliance that is placed on the Pensions Tax Manual when making tax-related decisions and why HMRC chose to go back on its own guidance. It raises the question about how administrators should use the guidance moving forward - after all, what's to stop HMRC from choosing another ‘ambiguous' phrase to target?

It's a very real possibility that pension administrators will face a claim from HMRC in its bid to recoup the tax relief that was granted on ‘in-specie' contributions to Schemes. This in itself poses a difficult scenario for scheme administrators to handle in how they then manage that claim with those clients, who ultimately benefitted from the dispensation.

The key is pre-emptive action and early intervention. Be transparent with your clients; explain the outcome of the case and the potential impact this might have on them. You're effectively placing your clients on notice and managing the risk, particularly if they are minded to pursue their own claim through the financial ombudsman in relation to the advice you gave at the time.

The reality is, any Scheme administrator that has carried out ‘in-specie' transactions in recent years will be affected by the decision although many chose to stop (or at least minimise) this kind of work in light of the Sippchoice Limited vs HMRC litigation.

HMRC's victory should serve as an opportunity to review internal processes and how each Scheme administrator uses and interprets its guidance when advising clients. It's also imperative that administrators carry out a full audit of all cases where ‘in-specie' transactions were involved to fully assess their potential exposure.

We may well be having the same conversations about the definition of ‘contributions paid' in years to come if an appeal is forthcoming. But what this ruling does do is bring into question HMRC's Pensions Tax Manual and how it is used across the industry - now and in the future. The Manual should not be relied on unquestioningly when making decisions for clients on tax-related matters.

This case could well set a precedent for future action by HMRC, with the potential for it to affect other areas covered by its guidance. Ultimately, Scheme administrators need to remember that relying on guidance (even if from HMRC itself) and general industry practice will not take precedence over statements of the law in the form of legislation itself.

Mohassan Mehmood is an associate in the commercial property team at Forbes Solicitors

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