UK Pensioners Dealt Further Blow In Guernsey RATS Case
Tuesday, August 14, 2012
A British couple that received incomplete tax advice in relation to a transfer
of pension entitlements to Guernsey retirement annuity trust scheme (RATS) have been
dealt a further blow in a recent ruling from the UK's Upper Tribunal, which agreed
that interest should be imposed on top of substantial income tax liable under an earlier 2010 ruling.
In 2010, old-aged pensioners Neil and Megan Gretton lost a tax case relating
to a transfer of GBP231,000 from a UK pension scheme to a Guernsey RATS, exposing the couple to an income tax claim worth GBP86,000.
The case related to the Gretton's membership of the Scottish Equitable Personal
Pension Scheme. Acting on the advice of their financial adviser, funds held for them by Scottish Equitable were transferred to a RATS established in Guernsey for their benefit.
Under the relevant Guernsey regulations, to be eligible to join such a scheme,
the person concerned had to become resident in Guernsey. Acting on incorrect advice, Mr
and Mrs Gretton purported to meet this requirement by acquiring the lease of a property
in Alderney, part of the Bailiwick of Guernsey, but they never actually took
up residence there.
The Tribunal said the adviser failed to take account of relevant UK conditions,
set out in practice note entitled Pension Schemes Office PS 121, which only
allows such a transfer to occur free of tax where an individual moves from the
UK to Guernsey or vice versa to take up employment. Mr and Mrs Gretton had no
intention of taking up employment in Guernsey, the Tribunal said, but their
advisers confirmed to Scottish Equitable that the conditions for a transfer
were met and accordingly the transfers were made on the strength of that representation.
The conclusions of an enquiry by the UK tax authority, HM Revenue and Customs (HMRC) into the transfers were that the pension
fund transfers did not meet the requirements of the reciprocal agreement between
the UK and Guernsey. As a result, the transfers breached the rules of the Scottish
Equitable Scheme which did not permit transfers to be made unless they were
to a scheme approved approved by the HMRC, a condition that would have been
met had the terms of the reciprocal agreement been satisfied.
In addition to seeking to charge interest on the tax so assessed, HMRC sought
to impose penalties equivalent to 45% of the tax payable under section 95 of
the Taxes Management Act 1970 (TMA) on the basis that Mr and Mrs Gretton were
negligent in delivering incorrect tax returns in the mistaken belief that the
terms of the reciprocal agreement had been met.
In the original ruling, the First-tier Tribunal found that Mr and Mrs Gretton
had not been negligent on the basis that they had reviewed the relevant explanatory
notes issued in the UK and Guernsey and had contacted the Guernsey authorities
to clarify the position. The First-tier Tribunal found that they had made an
honest mistake in focusing purely on the Guernsey requirements and not considering
PS 121, which their own adviser had not considered before the representation
as to the UK conditions having been met had been given to Scottish Equitable.
Consequently, the First-tier Tribunal concluded that the determination to impose
the penalties should be set aside, a course of action that was clearly open
to it by virtue of section 100 of the TMA, but it went further, stating in paragraph
89 of its decision “that 35 there should be no penalties or interest, for the
reasons given above, in the circumstances.”
In the latest ruling, the Upper Tribunal agreed with HMRC that the First-tier
Tribunal erroneously granted exemption from interest liability; the decision
exposing the couple to substantial interest liability.
The Upper Tribunal concurred that the First-tier Tribunal did have the jurisdiction
to decide that no interest would be payable. This is on the basis that Section
86 of the TMA provides that:
- "(a) Any amount on account of income tax which becomes due and payable in accordance with section 59A(2) of this Act and;
- (b) any income tax or capital gains tax which becomes due and payable in
accordance with section 55 or 59B of this Act,
Shall carry interest at the rate applicable under section 178 of the Finance
Act 1989 from the relevant date until payment”.
HMRC successfully argued that the use of the word 'shall' had been used to indicate
that there is no discretion as to whether interest should be applied to any
amount of tax paid after the due date, further supported by the fact that the
statute provides no right of appeal against the application of interest in such