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:
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 cases.