The first-tier tribunal has ordered an individual to seek professional advice after he tried to claim tax deductions for investments made towards his retirement.
The tax tribunal heard the case of Bharat Patel, brought by HM Revenue and Customs, after enquiries were made into his 2009 to 2010 self-assessment tax return and the tax affairs of his company World Class Products Limited.
The results of these enquiries were subject to a review, which was then appealed.
Most of the issues in the appeal were settled following an alternative dispute resolution process, however three issues remained outstanding, which were subject to the tribunal hearing.
Mr Patel is a self-employed locum pharmacist, with trading income taxed.
He also owns World Class Products, through which he had intended to import medicines. This business did not commence, although he intends to undertake his locum pharmacist business through the company.
The first outstanding issue was around an interest deduction claimed by Mr Patel in respect of a loan taken out from Natwest and used to buy guaranteed equity bonds to provide income in his retirement in an arrangement described as a self-investment personal plan.
The second issue was whether Mr Patel was entitled to a deduction for the cost of acquiring these bonds as part of his Sipp.
Judge Aleksander Derek Speller found neither the interest on the Natwest loan, nor the cost of the bonds is an allowable deduction against Mr Patel’s trading income, adding that on no basis can his arrangement be described as a self-invested personal pension.
“He is just saving for his retirement”, read the decision, pointing out the bonds were not purchased and the loan was not taken out for the purpose of any trade undertaken by Mr Patel.
“We also note the arrangements do not amount to an approved personal pension scheme, for which a deduction is allowed under the relevant statutory provisions for pension contributions.”
Mr Patel argued banks were not prepared to lend to small companies, which is why he had to take out the loan and buy the bonds personally, but the tribunal stated if the loan had been made to the company, it would have been allowed a deduction for the interest expense.
The tribunal noted that whether or not the loan interest would have been deductible in the hands of the company would depend on various factors – but the tax rules for loan interest for companies were very different to those which applied to loan interest incurred by unincorporated traders such as Mr Patel.
Even if the bonds had been purchased by a company, the price would not be deductible in computing the company’s income for corporation tax purposes, rather it would have been a capital expense and not be under an approved pension scheme for which a statutory deduction was available.
“Indeed, if the arrangement could be described as a pension scheme, the arrangements would be ‘unapproved’ to which a complex tax regime would apply – possibly to the great disadvantage overall to Mr Patel.”
The purchase of the bonds was not a contribution to an approved pension scheme for which a statutory relief applies, the judge added.
Mr Patel’s conduct in claiming a deduction was “careless” and penalties were therefore chargeable, however, the judge stated that if Mr Patel had the benefit of competent advice, he may never have got himself and his company into this position.
Penalties were therefore suspended for two years on the condition that Mr Patel engages a professional accountant or chartered tax adviser and files accurate tax returns on time.
Earlier this year, the Association of Member-directed Pension Schemes complained several banks are refusing to open accounts for small self-administered schemes, stating that they need to be affiliated with a regulated entity or have a corporate trustee in place, neither of which is deemed mandatory by regulators.
peter.walker@ft.com
