Saver levied £4k tax charge after failing to seek advice

Saver levied £4k tax charge after failing to seek advice

A First Tier Tribunal has confirmed a £4,000 unauthorised payment surcharge imposed on an individual who entered into a pension scam using her self invested personal pension.

The tax tribunal dismissed Clare Franklin's appeal against an unauthorised payment surcharge as it said she had not acted reasonably in entering into the scheme after she failed to seek independent financial advice.

The tribunal's judgment (published April 9) outlined how Ms Franklin, who was 44 at the time, had entered into a pension backed loan scheme in 2011 which involved transferring her existing pension into a Sipp.

On August 31 she transferred about £51,000 from her civil service pension scheme into the Sipp.

The Sipp then purchased shares in KJK Investments which then lent money to G Loans which lent Ms Franklin 50 per cent of her pension fund.

The gross amount of the loan to Ms Franklin was £26,842 at a 5.5 per cent fixed interest-only basis, with the interest paid in advance and subject to an arrangement fee of £1342. This left Ms Franklin with a loan advance of £24,104 which was paid into her bank account.

In 2015, KJK Investments and G Loans were wound up following an investigation by the Insolvency Service.

Before entering the scheme Ms Franklin was made aware that individuals using the scheme received unauthorised payment charges from HM Revenue & Customs. However, she said the tax advisers to the scheme, Optimum, told her that no tax was payable on loans under the scheme.

Payments that are made out of a pension which do not meet certain conditions, for example if a person were to access pension funds before the age of 55, will be subject to an unauthorised payment charge of 40 per cent and a surcharge of 15 per cent of the funds.

HMRC argued that the loan to Ms Franklin was an unauthorised payment as it used funds from her Sipp, and imposed a 40 per cent charge of £10,736 on the £26,842 loans and a 15 per cent unauthorised payment surcharge of £4,026.

Originally, Ms Franklin disputed both charges but later agreed to pay the £10,736 but further contested the surcharge cost.

Tribunal judge, Michael Connell, dismissed Ms Franklin’s appeal after he found that Ms Franklin did not act reasonably in relation to entering into the scheme and receiving the unauthorised payment.

Mr Connell said: "[Ms Franklin] believed the payment to be a loan and that it would not be ‘a connected payment’. This belief was based on the opinion of a third party, Optimum, which, subject to certain qualifications, stated that the scheme was risk free.

"However it also reiterated that HMRC may not have shared that view and that there was at least some risk of a 55 per cent penalty.

"The appellant nonetheless decided against taking independent legal, accounting or tax advice before making the decision to proceed."

He added: "The appellant’s belief that the scheme did not contravene pension’s legislation was not based upon reasonable grounds.