SIPP administrator avoids tax charge due to 'reasonable belief' arrangements were not pension liberation

However, tax expert Ian Hyde of Pinsent Masons, the law firm behind Out-Law.com, said that the first-tier tribunal's decision in this case showed the "difficult position" scheme administrators were often in "in having to police the system to prevent pension liberation".

"HMRC often seeks to apply hindsight to say that administrators should have been aware of a particular pension liberation structure when at the time it was not well known," he said.

A SIPP is a type of personal pension plan which allows individuals to choose how their savings are invested, across the full range of investments approved by the UK government and tax authorities. Unlike many SIPP providers Sippchoice, which appealed this case to the first-tier tribunal, was willing to accept a broad range of non-standard investments such as unquoted shares and unregulated collective investment schemes.

The dispute with HMRC related to investments by Sippchoice customers in Imperium, which held itself out to be a Liverpool-based property investment company. Unknown to Sippchoice, money invested by its customers in Imperium was being used to purchase shares in a connected company, SKW Investments, which was then making loans to the SIPP customers. The effect was that Sippchoice's customers were borrowing indirectly from their own pension funds.

Schemes like that operated by Imperium are known as pension liberation arrangements, which are designed to get around pension scheme rules preventing an individual from claiming pension benefits until they reach the age of 55 unless doing so on ill-health grounds. Tax charges on 'unauthorised payments' from pension schemes can be as much as 55% of the value of that payment.

In this case, HMRC was of the view that Sippchoice had not done enough to ensure that its product was not being abused in this way. Because of this, it had levied a scheme sanction charge of 40% against the provider. Sippchoice appealed under section 269 of the 2004 Finance Act, which provides a defence against such charges to scheme administrators that "reasonably believed that the unauthorised payment was not a scheme chargeable payment" and where it would not be "just and reasonable" for the administrator to be liable for the charge.

The first-tier tribunal heard that members of staff at Sippchoice had suspicions about the validity of the Imperium scheme as early as August 2010, however that these suspicions were "gut feelings" and not based on evidence. Staff repeatedly sought assurances from Imperium, which were always provided. It was not until 4 August 2011, following a dissatisfied email from a customer who had used his pension fund to obtain a loan from SKW, that Sippchoice refused to accept any new business from Imperium.

The tribunal found that Sippchoice's staff had satisfied themselves that "there was no 'simple' pensions liberation scheme being operated through Imperium", but "did not appreciate that a more sophisticated scheme might be being implemented" through connected companies. However, it held that it was reasonable for them to do so, given that they had been misled by "misinformation deliberately given them by Imperium".

"In our judgment the evidence does not disclose circumstances which would have indicated to [Sippchoice] that a more sophisticated scheme was being operated," the tribunal said.

"It is always easy after the event to point to things that were not done which, if they had been done, might have revealed the nature of the alleged scheme. But, in our judgment, approaching the matter realistically, [Sippchoice] recognised the possibility, in broad outline, that Imperium might be a front for a pensions liberation scheme and made proportionate enquiries of Imperium. It was reasonable for them to be satisfied with the responses received, which reasonably appeared to them to be genuine and reassuring," the tribunal said.

"There does at least appear to have been a measured assessment of the evidence in the case by the tribunal, and those in the pensions industry grappling with transfers and payments in a current climate of suspicion about scams and liberation activity can take some comfort from that," said Ben Fairhead, a pension scams expert at Pinsent Masons.

"That said, the matters in this case date back to 2010/11 before the real upsurge in liberation activity, and before the Pensions Regulator's 'scorpion' campaign began in February 2013. I would expect other cases like this might follow - HMRC does, after all, see pension liberation as a form of tax avoidance - and it will be interesting to see whether the tribunal's interpretation of what is 'reasonable' for the purposes of the good faith discharge changes against the backdrop of developing awareness of scams," he said.