HM Revenue & Customs (HMRC) has been told to allow pension tax relief at source on in-specie contributions, granting a provisional reprieve on what could amount to millions of pounds in tax money.
The taxman lost its case against self-invested personal pension (Sipp) provider Sippchoice, which had taken it to the first-tier tribunal over a dispute involving four of its clients.
HMRC had denied claims for tax relief at source where clients made in-specie contributions to their Sipps.
In-specie contributions are where assets such as property or shares are transferred into a Sipp without first being converted into cash.
In theory the scheme administrator can claim basic rate tax relief on these contributions from HMRC while the member can claim any tax relief above the basic rate, in the same way as with cash contributions.
But HMRC appeared to change its stance on allowing tax relief in 2016, leading to providers suspending such contributions and gearing up for a fight through the legal channels.
It was feared the taxman would come back and claim millions of pounds from clients across the Sipp industry.
In a ruling on 10 March tribunal judge Heather Gething ruled HMRC could not claim tax on assets contributed to Sipps in lieu of cash, saying “the meaning of ‘contribution paid’ is wide enough to cover a transfer of assets in satisfaction of a debt as occurred in this case.”
Sippchoice’s case centred on one of its clients - Mr Carlton - who in the period 6 March to 5 April 2016 made a claim for relief from income tax at source in respect to a contribution worth £68.342.
HMRC denied the claim for relief. Sippchoice contested that decision and included the denied claim in its annual relief at source claim.
HMRC refused that claim, leading to Sippchoice appealing this decision.
Judge Gething questioned HMRC’s interpretation of the tax simplification rules introduced in 2006.
She said: “It seems to me the purpose of the post A day pension legislation was to enable and encourage taxpayers to provide for their retirement and to protect them from (i) the tyranny of interest rates prevailing at the date of retirement which directly affects the value of an annuity which had to be purchased within a limited period of time following retirement, and (ii) the loss of the capital value of the pension pool upon the death of the taxpayer which has nothing to do with contribution in cash or kind.
“Preventing contributions in kind does not seem to be the mischief at which the legislation was aimed.”
Chief operating officer at Sipp firm Mattioli Woods, Mark Smith, said the decision could have major ramifications for the sector as most firms would have clients affected and the sums could run into several millions of pounds.
Mattioli Woods’ accounts for 2017 showed the group alone expected to receive assessment notices for up to £0.9m, which it said it would appeal.
Mr Smith said: “This had been accepted practice in the pensions world well before A day but about two years ago HMRC started to push back and notified firms the in-specie process was being reviewed nad tax assessments issued as a result.