Upper Tribunal: 'in specie' SIPP contributions were taxable

Strategic thinking by providers will be needed regardless of whether they are contemplating further challenge or prefer to take mitigating steps based on acceptance of the ruling.

The Upper Tribunal has granted an appeal brought by HM Revenue and Customs (HMRC) in a dispute with SIPP provider Sippchoice Ltd. It ruled that the tax legislation only allows tax relief on contributions paid in money and not on 'in specie' contributions such as shares or property. The tribunal also ruled that HMRC's long-standing view that a SIPP member can give effect to a cash contribution by transfer of assets is wrong.

The effect of the ruling is that individual tax relief granted on all in specie contributions must be paid back to HMRC, even if the procedure published in HMRC's Pensions Tax Manual was followed.

Many SIPP providers have traditionally allowed pension savers to give effect to cash contributions by transferring assets, such as shares or property, to the SIPP. HMRC guidance has always said that this is allowed, provided a certain procedure is followed.

A few years ago, HMRC started arguing that many SIPP providers were not following its procedure, and demanded that the tax relief granted on the contributions be paid back. Understandably, the SIPP providers appealed. Most cases were put on hold pending the outcome of the Sippchoice case, which was the first of these to go before the Upper Tribunal.

For the pensions industry, this long-awaited ruling was meant to be about whether the steps taken by providers to achieve HMRC's work-around were being correctly followed. Instead, it has now been told that HMRC had no place putting forward the published procedure in the first place.

The industry will be hoping that Sippchoice Ltd appeals this decision, and wins. Otherwise, the ruling stands as precedent and, absent an appeal, HMRC is now likely to start demanding that previously granted tax relief on in-specie pension contributions be returned.

Next steps for providers

Sippchoice has said that it will "pursue the implications of the defective guidance with HMRC", which may include an appeal of the Upper Tribunal's decision to the Court of Appeal.

Other SIPP operators whose appeals were on hold pending the outcome of the Sippchoice case remain free to pursue their own tax tribunal appeals but, realistically, should be prepared for their appeals to go at least as far as the Upper Tribunal but most likely to the Court of Appeal. This will have significant costs implications.

Aside from the tax tribunal route, the most obvious way forward now for many SIPP operators will be to claim that they relied on HMRC's guidance or had a legitimate expectation that HMRC would not resile from its own guidance, and that therefore HMRC should not seek to reclaim the tax relief in these cases.

These arguments are notoriously difficult to sustain and – unless HMRC honours its guidance and accepts that a SIPP operator followed it – can only be considered as part of a judicial review claim before the High Court or, in certain circumstances, the Upper Tribunal. Strategy and tactics will need to be carefully planned. HMRC's first response is going to be that many SIPP operators did not in fact follow the guidance, and so reliance cannot be placed on it. This comes back to being able to carefully argue compliance with the HMRC guidance in each individual case.

Most SIPP providers stopped allowing in specie contributions a few years ago, so this is largely a historical issue. Providers will now be considering whether, and if so how, to break the news to members that their pension pots are now not as valuable, as the tax relief will need to be repaid to HMRC. Higher rate taxpayers who claimed marginal rate relief on in specie contributions through their tax returns will now face amended tax assessments, and SIPP providers and advisers will need to warn their clients that this is coming. And what about pensions already taken or transferred away? Should the claimed tax relief be traced, and affected transfers and pension payments unwound?

Care is needed around topping up the pension pot, to make up for missing tax relief. Doing so might amount to a further contribution, which can bust lifetime allowance protection or cause the individual's annual allowance to be exceeded.

Likewise, undoing a contribution - if, for example, the individual wanted to transfer back the asset from the SIPP - isn't easy. As a start, you would need to establish that the contribution was intended to be conditional on tax relief being available. This is likely to be a high burden, with HMRC potentially arguing that a transfer back is an unauthorised payment from the SIPP.