Gratton v Revenue & Customs [2010] UKFTT 521 (TC)

FTT-Tax
Gratton v Revenue & Customs
[2010] UKFTT 521 (TC) · 2010-10-28
[1]The Appellant appeals against the review decision issued on 13 August 2009 by the Inland Revenue, Pension Scheme Service, Technical Section (Alan Welsby).[2]The Appeal concerns the pension fund transfer on 31 July, 1996 made by Scottish Equitable Personal Pension to the NBCG Guernsey Retirement Annuity Trust Scheme (“NBCG GRATS”) on behalf of Mr Gratton and the pension fund transfer on 31 July, 1996 from Scottish Equitable Personal Pension Scheme to MFG Guernsey Retirement Annuity Trust Scheme (“MFG GRATS”) on behalf of Mrs Gratton. The contention is that these transfer payments were unauthorised giving rise to Schedule E charges on Mr and Mrs Gratton, the Appellant, pursuant to Section 647 ICTA 1988. The transferred sums were £152,991 for Mr Gratton and £78,841 for Mrs Gratton.[3]The Commissioners contend that the transfers are unauthorised payments pursuant to Section 647, ICTA 1988 and assessments have been issued for tax payable by Mr Gratton of £58,650 and tax payable by Mrs Gratton of £27,350. The tribunal must decide if these assessments are appropriate.[4]The Commissioners have issued directions under Regulation 72, PAYE Regulations 2003 (SI 2003/2682) and is asking that these directions be upheld with no part of the Schedule E liability recovered from Scottish Equitable. Further, the Commissioners have made penalty determination on Mr and Mrs Gratton and take the view that the penalties should be charged at 45% of the tax payable. Further, the Commissioners are seeking to charge interest.[5]The assessments with regard to the year 1997/8 were discharged and are not the subject of appeal. The relevant facts[6]Mr and Mrs Gratton have personal pension schemes with Scottish Equitable and are also members of the Crouch Chemicals Ltd Pension Plan.[7]Sometime before 1996 Mr and Mrs Gratton attended a seminar on pensions planning held by Knightsbridge Associates (later Knightsbridge International) a company which is owned 100% by Richard Knight, a FIMBRA registered adviser. They met Terry Moore, a self-employed agent with Knightsbridge Associates.[8]Mr Knight, the owner of Knightsbridge Associates, offered to the Appellant, as one of his products, a pension planning scheme designed by Mr Malcolm Tune (a financial adviser later convicted of fraud).[9]The Appellant became interested in the product which avoided having to buy an annuity with their pension funds and enabled the funds to be part of their estate on death. The idea involved migrating their existing pension funds in order to bypass the requirements of the UK pension regime. The transferred funds could be accessed through loans.[10]In order for the proposed scheme to be implemented in Guernsey, it was required that Mr and Mrs Gratton become resident in Guernsey or Alderney, a bailiwick of Guernsey. It was explained that it would be necessary to rent a property in order to establish a place of residence on the island. The lease rental should be for one year with three months rent being paid in advance. It was also required that they spend at least one night of the tax year on the island. It was explained that it was not required for the Appellant to continue with Guernsey residence after one year, when the lease could be cancelled.[11]It was necessary for the existing pension funds in the UK to be transferred overseas in order to implement the scheme. This required that a transfer application be made to Scottish Equitable, who held those funds. Mr Tune organised and submitted the application to Scottish Equitable. A covering letter dated 27 June 2006 was sent by Clarke Middleton, financial advisors to the Appellant, with the forms confirming that all was in order to effect the transfer.[12]The scheme sounded attractive to the Grattons since they were promised a loan back from the fund (though they never actually took any money out of the funds). Mr and Mrs Gratton saw it as an attractive way of making financial provision for their children and grandchildren through the use of various trusts.[13]In order to effect a tax free pension transfer, the requirements of the Reciprocal Transfer Agreement between the UK and Guernsey (“PS 121”) had to be satisfied.. It stated, inter alia, that the receiving pension scheme must be approved by the Guernsey authorities and the arrangements were meant to facilitate a transfer on change of jobs. At the time of the transfer, the transferee schemes were approved schemes pursuant to section 157A of the Income Tax (Guernsey) Law 1975, as amended.[14]The Scottish Equitable Scheme Rules allowed the transfer of funds out of the scheme at a member’s request provided the scheme to which it was transferred was approved by the UK Inland Revenue in terms of Inland Revenue “literature “ setting out such approval. Such approval would be given automatically if PS 121 was complied with.[15]The UK Pension Office has discretionary power, Section 591 ICTA (Occupational Schemes and Section 631 ICTA (Personal Pensions), to approve and review applications for approval of pension schemes.[16]The Pension Schemes Office issued Memorandum 117 (IR12 (1991)), a practice note, which gave an explanation of the requirement of the reciprocal transfer of pensions between the UK and Guernsey. In that document, there is a reference to PS 121 giving details of the arrangements for the transfer of pension rights between the UK and Guernsey.[17]PS 121 states in paragraph 1 that arrangements have been made, on a reciprocal basis, to facilitate the transfer of pension rights where “on a change of job, an individual moves from Guernsey to the United Kingdom or vice versa”. It then sets out the requirements for a transfer.[18]The Scottish Equitable Personal Pension Scheme rules (paragraph 12) does contemplate the transfer of pension funds. It sets out the schemes to which funds may be transferred and then has a sweep up clause (Clause 12(2) (4) ) which allows the transfer of funds to “other schemes” where such a scheme is an approved scheme. In other words, the transferee scheme had to be a scheme approved by the Inland Revenue as required under the scheme rules. .This was a requirement for the transfer of funds. In the event of a transfer of pension funds from the UK to Guernsey to a scheme not authorised by the UK Inland Revenue, the transfer would be an unauthorised payment pursuant to section 647 ICTA 1988, which would give rise to a tax charge. The scheme rules are clear on the conditions for transfer. The scheme rules therefore require implicitly the UK Inland Revenue approval for a valid transfer of funds out of the scheme.[19]On the advice of their advisors and in order to satisfy Guernsey requirements, the Grattons entered into a lease of a property in Alderney and paid rent for the property for a period of three months from 3 May 1996. They made visits to Guernsey between 4 May 1996 and 31 July 1996 totalling a few days in total. They did not occupy the property for which they had taken a lease. They wanted to be treated as resident in Guernsey.[20]The Guernsey authorities published some background information in Explanatory Notes dealing with Retirement Annuity Trust Schemes (RATS) dated October 1997 and January 1999 (“Explanatory Notes”). In the Notes it is stated that in order to join a RATS, an individual had to be resident in Guernsey. Paragraph 2(c) of the Notes states that residence for this purpose would include being “present in the island at any time with the intention of setting up a dwelling and actually doing so in that year or the following year”. The Notes stated that they were not to be taken “as a definitive statement of the law or any particular aspect, or in any particular case, and it is strongly recommended that the appropriate advice is taken before entering into a scheme”. This health warning was at the very beginning of the Notes and applied to all its provisions.[21]The Commissioners obtained details of the transfer by Mr and Mrs Gratton after conducting a criminal investigation into the promoters of similar schemes.[22]The Commissioners believe that the transfer of the pension funds to Guernsey from Scottish Equitable fell to be taxed under Section 647 ICTA 1988 as income under Schedule E and within the PAYE regime. The requirements of PS 121 were not met and therefore the transfer was not authorised by the scheme rules.[23]On 7 July 2003 the Commissioners wrote to the Grattons outlining their position explaining that the transfer had not met the criteria set out in the Reciprocal Arrangement between Guernsey and the United Kingdom.[24]The accounting firm advising the Appellant, Clay, Ratnage Strevens & Hills, questioned the relevance of PS 121 in deciding whether a tax charge arose under section 647 ICTA 1988. There were several correspondences between these parties but there was no settlement of the core issues. The change of jobs requirement in PS 121 was fundamental, in the Revenue’s view, in effecting an approved transfer of funds pursuant to the scheme rules. The Explanatory Notes issued by the Guernsey authorities was not in their opinion, strictly relevant. It explained the Guernsey requirements for joining a retirement annuity scheme only.[25]The Commissioners wrote to Scottish Equitable stating that the transfers fell to be taxed under section 647 and therefore came under the PAYE regime and asked for payment of the PAYE. They asked whether they felt that they had made an error in good faith and if so , a direction under the PAYE Regulations could be considered. The Commissioners decided on the facts that Scottish Equitable were not liable for the PAYE tax on the payments.[26]Assessments were therefore made on the Appellant for the tax due together with penalties and interests. APPELLANT SUBMISSIONS[27]The following arguments were presented by Mr Craddock on behalf of the Appellant. 1. The general point was made that the Appellant acted in good faith, not seeking to deprive the Revenue of tax and seeking to reserve the funds in their pension for their children and grandchildren. 2. The Tribunal was made aware of the age of the Appellant (75 and 76 with Mr Gratton suffering from Parkinsons) and the likelihood that the Appellant can become bankrupt as a result of having to pay the sums required under the assessments. 3. The scheme was approved under section 157 of the Income Tax (Guernsey) Law 1975 and the reason for the withdrawal of approval by the Guernsey tax authorities was not in relation to any dispute over the status of the transfers from the Scottish Equitable Personal Pension Scheme. 4. At the time the retirement annuity schemes were established, Guernsey were not rigidly enforcing the “change of job” requirement or the transfer of pension funds. The island wanted to attract this type of business. 5. The Explanatory Notes required only that a person be resident in Guernsey in order to be a member of the retirement annuities scheme. The Appellant satisfied the requirement in 2(c) of the Explanatory Notes and therefore were resident. It was their intention at the time to settle in Geurnsey. There was no requirement in the Explanatory Notes for an individual to have changed jobs but only to be resident in Guernsey. The fact that the Grattons were not making further contributions to their pension fund made the job requirement superfluous. 6. The Explanatory Notes “held out” to the member and their advisers the requirements of Guernsey authorities. The Appellant relied on this representation.[28]The Appellant makes further submissions below.[29]The fact that there was a discretionary pension trust holding the funds meant the transaction contemplated did not have a preordained series of steps which were designed to achieve a particular tax result. The existence of independent trustees meant that by its nature the transactions contemplated were not automatic ( Dexter v MacDonald ) There was a commercial intention to settling in Guernsey.[30]The requirement in section 2(c) of the Explanatory Notes was only one of present intention. The evidence showed that the Grattons intended to start a European consultancy business and therefore satisfied this requirement[31]The Guernsey authorities, who had a discretion in the implementation of the Reciprocal Agreement, only required a person to be resident in Guernsey in order to be a member of a retirement annuity scheme. There was no requirement, as there was in the UK, for a change of jobs to also take place. For a time, the Grattons were actually resident in Guernsey.[32]The Guernsey authorities were implementing PS 101 as they saw fit. For this purpose they provided the Explanatory Notes which are handed out to prospective investors in pension schemes. It was fair and reasonable to rely on that document as being comprehensive of the requirements for prospective investors who transferred their pension funds. The Explanatory Notes, issued by the “Administrator of Income Tax Guernsey”, clearly stated which individuals qualified as residents, it provided:, “Present in the Island at any time with the intention of setting up a dwelling place and actually doing so in the year or the following year”.[33]The purchase of property or the renting of premises on a long lease was sufficient to establish residence for this purpose.[34]The rules of the Scottish Equitable Scheme stated that the members’ funds can be transferred to one or four types of schemes. The relevant scheme which the Appellant sought to bring themselves within was, “any other scheme approved for the purpose of this rule by the Inland Revenue and approval here may be obtained by following and adhering to a process set out by the Inland Revenue in its literature”. The relevant Inland Revenue literature was the Inland Revenue Memorandum 117 dated 13 January 1994, issued by the Pension Scheme Office. The section headed specifically “Reciprocal Transfer Agreements with Jersey and Guernsey” refers to the revision of the existing transfer agreements with Jersey and Guernsey . The revised document, PS 121/ 95, “Arrangements for the Transfer of Pension Rights between the United Kingdom and Guernsey” explained the Inland Revenue current views. This document represents the agreed position between the UK Pension Scheme Office and the Guernsey Administrator of Income Tax, Since there is no recognised approval mechanism (e.g. a clearance letter from HMRC) for the approval of the transfer of funds between the transferor scheme and the transferee scheme , all payments which are compliant with the Reciprocal Transfer Agreement are therefore authorised payments under the scheme rules.[35]The Inland Revenue have not suffered any loss of tax as a result of the transfer of the pension funds. It is possible that the Grattons may eventually pay more tax as the funds will be treated as part of their estate for inheritance tax purposes.[36]A distinction can be drawn between the transfer out of the UK and the receipt of the funds in Guernsey. The transfer of the funds from the UK only required that there be a transfer from one approved pension fund to another approved fund of which the Appellant were members. Respondents’ Submissions[37]The Respondents say that the Appellant who enjoyed the benefit of tax exemption on their personal pension schemes entered into a tax avoidance arrangement to transfer their personal pension schemes outside the UK tax net.[38]Under section 647 ICTA 1988 the payments from the Scottish Equitable Personal Pension Scheme are chargeable to tax under Schedule E. Payments would be chargeable unless they were authorised payments. To be authorised, the payments would have to be made under the rules of the scheme and therefore in accordance with the UK/Guernsey Reciprocal Agreement as set out in PS 121.[39]The requirements of PS 121 were not met because the Appellants did not move to Guernsey on a change of job. They remained in the UK as directors of Crouch Chemicals Ltd and did not take up new job in Guernsey as required.[40]The transfer of pension funds did not fulfil the requirements of PS 121 and there cannot therefore be transfers authorised by the rules of the Scottish Equitable Personal Pension Scheme.[41]The only transfer the Inland Revenue allowed were those for people who were going to live and work in Guernsey and who met the terms of the Reciprocal Agreement.[42]Scottish Equitable applied for a direction under Regulation 72(5) of the PAYE Regulation that they were not liable to deduct PAYE on the basis that they took reasonable care and the error in not deducting tax from the payment was made in good faith. Such a direction was granted by the HMRC PAYE Directions Unit on the basis of Scottish Equitable were following normal transfer procedures. They were informed that the transfer was to proceed in accordance with Memorandum 117 and as such it met the conditions set out in the UK/Guernsey Reciprocal Agreement. Scottish Equitable were informed in June 2006 by Clarke Middleton Associates, financial advisers, that the transfer met those requirements The Inland Revenue say that this was not an accurate representation.[43]The Appellant had neither met nor intended to meet the conditions for a bona fide transfer and should be liable to pay the full amount of Schedule E tax due without any deduction for PAYE which should have been deducted.[44]The Appellant entered into a tax avoidance scheme to transfer their pension schemes to Guernsey. They deliberately entered into a series of transactions intending to remove their pension funds outside of the UK tax regime. They knew that they did not fulfil the conditions of the Reciprocal Agreement to transfer their pension schemes and they have therefore been negligent in delivering an incorrect return. In the circumstances they should bear the penalties. The Inland Revenue have given an abatement to the penalties by 55% for their corporation and disclosure. The law[45]The Scottish Equitable Personal Pension Scheme was approved under Part XIV of ICTA 1988.[46]Section 647 ICTA 1988 charges payments made to or for the benefit of an individual out of an approved Personal Pension Schemes to tax under Schedule E unless the payment is expressly authorised by the rules of the pension scheme.[47]The rules of the Scottish Equitable Personal Pension Scheme provided for transfer payments to be made as follows:[48]The members fund may be transferred to:-(1) another approved personal pension scheme;(2) an occupational pension scheme approved under Chapter 1 of Part XIV of the Act of which the member is an existing scheme member (otherwise than in relation to the transfer payment);(3) a relevant statutory scheme as described in section 611A of the act of which the member is an existing scheme member (otherwise than in relation to the transfer payment);(4) any other scheme approved for the purpose of this rule by the Inland Revenue (and approval here may be obtained by following and adhering to a process set out by the Inland Revenue in its literature).[49]Pension Schemes Office (PSO) Memorandum 117 (13 January 1994) advised there were revised arrangements for transfers to Guernsey – set out in form PS 121/95[50]PS121/95 confirmed the circumstances in which an agreed transfer between Guernsey and the UK may take place. Paragraph 1 states:
“Arrangements have been made, on a reciprocal basis, to facilitate the transfer of pension rights where, on a change of job, an individual moves from Guernsey to the United Kingdom or vice versa.”
Where the transfer is proceeding in accordance with the terms of PS 121 no further approval is needed. The Respondents say that the transfer of funds is not approved since PS 121/95 was not satisfied. The payments are unauthorised and liable to tax.[51]Where the payment is chargeable (ie unauthorised ) under Schedule E it is liable to the PAYE provisions in s.203 ICTA 1988. The Appellant is liable for this tax, penalties and interest.[52]Findings of facts The Tribunal finds the following facts. 1. The Appellant entered into joint formal lease for a property in Alderney. 2. The Appellant made a series of visits to Guernsey to investigate business opportunities. 3. The Appellant were resident in the UK in 1996 and were directors of Crouch Chemicals Ltd which is based in the UK. 4. The Appellant sought professional advice from Mr Terry Moore and others in the implementation of a scheme for the transfer of their pension funds to Guernsey. 5. The Appellant believed they had satisfied all the legal requirements for their transfer based on the advice which they received. 6. The Appellant wanted to transfer their pensions to Guernsey in order to benefit from deferred annuity opportunities outside the UK pension scheme regime. Their respective pension fund would form part of their estate on death and they were not obliged to buy an annuity as required under UK law.[53]Witness Evidence The evidence of Terry Moore Terry Moore, an adviser to the Appellant, gave oral evidence as well and provided a witness statement. Mr Moore made the following points: 1. At the time of meeting the Appellant he was a self-employed agent with Knightsbridge Associates (subsequently Knightsbridge International) which is own 100% by Richard Knight, a FIMBRA registered business. 2. He introduced the Appellant to a product being sold by Mr Malcolm Tune which was designed to release funds from pension funds. 3. The Appellant were existing clients of Knightsbridge Associates. 4. The attraction to the Appellant of the scheme called the “Pension Migration” was that it enabled pension funds to be transferred to an individual’s estate on death. The Grattons had children and grandchildren and wanted to make provisions for them in their will using their pension funds. 5. The administration and paperwork side of the product was handled by Mr Malcolm Tune. 6. Mr Moore was charged but acquitted of conspiracy to defraud HMRC. 7. Mr Moore prepared all application forms which are submitted to Scottish Equitable by Mr Tune to facilitate a transfer of the pension funds. 8. The Guernsey authorities accepted the transfer of the pension funds from the UK as being lawful and the Appellant were resident in Guernsey. The Guernsey authorities sent Guernsey tax returns to be completed by the Appellant which they did. 9. Mr Moore sold the scheme to other clients in similar circumstances some of whom had pension funds in excess of that of the Appellant. 10. He explained that after the transfer of funds to Guernsey there was a further transfer to purchase an annuity from the Friendly Society of Sark which caused the scheme to loose its approval. The withdrawal of approval therefore had nothing to do with the actual transfer of the funds from Scottish Equitable but rather to do with the transfer of funds from Guernsey to Sark. 11. Mr Moore drew a distinction between the transfer of the funds out of the UK and the receipt of the money in Guernsey. He said he thought the transfer was lawful and this is evidenced by the fact that Scottish Equitable were happy with the documentation presented to them to facilitate the transfer. It was Scottish Equitable’s obligation to ensure all necessary compliance was undertaken. He saw the scheme as providing a loophole in the law that allowed UK taxpayers to have access to their pension funds without a need to purchase an annuity. He saw it as valid tax avoidance and there was nothing illegal in the structuring. 12. He said he had never heard of PS 121 but in any event it was up to Scottish Equitable to be satisfied that all requirements had been met for the transfer to take place and there should not have been a transfer if those requirements had not been met. 13. Mr Moore was a credible witness. The evidence of Ian Laird[54]Mr Laird is a Chartered Accountant who has acted for the Appellant for several years he provided a witness statement as well as oral evidence.[55]The following points were made:(1) He said the Appellant were people who were always tax compliant and paid all taxes due on time. They were honest people. He said that there was a good case for all penalties to be waived.(2) He made reference to a visit by HMRC officer Mr A M Turner on 6 June 2001 to the home of the Appellants. He described the visit as aggressive and confrontational. It is the Tribunal’s understanding that HMRC have issued an apology to the Appellant regarding the conduct of this visit by this officer.(3) He said in his experience, the way in which the investigation was conducted was not normal. Normally, the HMRC find common ground with the taxpayer and agree a settlement. This has not been the case in this matter.(4) The fact that the Guernsey tax authority were not contacted by the UK Inland Revenue was unusual(5) He was not aware that Mr Malcolm Tune was convicted of tax fraud and he was not involved in the implementation of the Pension Migration Scheme. He only became aware of it at a very late stage. The only pension advice he gave to the Appellant was to consolidate their several personal pensions.(6) He dealt with the discovery assessments which were later made on the Appellant.(7) In his witness statement, at paragraph 5 he makes the following point: “Mr Tune clarified by telephone his understanding that under Guernsey law for purposes of meeting the conditions for GRATS it was possible to attain status as a resident of Guernsey simply by maintaining a residence in the Guernsey jurisdiction for a period of 90 days and organising a visit either during that year or during the following year. Indeed, he was clear that this approach satisfied the States of Guernsey Income Tax Office. His belief that there was no requirement for the individual to be employed in Guernsey and contended that this was, in any event, irrelevant for the purposes of establishing whether a tax charge should arise now at this late date. Mr Tune was adamant that the transfers were made to GRATS in Guernsey that were approved at the date of the transfers and that that approval was sufficient to secure authorised payment status for the transfers from Scottish Equitable”.(8) He also says at paragraph 13: “On the matter of penalties, I believe is entirely inappropriate for any penalties whatsoever to be levied in this case. The actions of Mr and Mrs Gratton have never involved any intent to evade tax or avoid tax or to deprive HMRC of any revenue whatsoever. Furthermore, it has never been their intention to even save tax in that their sole intention was simply to adopt a course of action that would enable them to benefit from the deferred annuity rules that exist outside the UK and to preserve their pension fund as part of their estate which would, of course, be subject to Inheritance Tax in due course. In this respect, if the assessments were allowed to stand there will, in my view, confer an unfair benefit in favour of HMRC, given the fact that the course of action followed by Mr and Mrs Gratton has served to potentially increased their overall tax liability”.(9) He also states that they fully co-operated and disclosed to the Commissioners throughout the course of the enquiries. Evidence of Megan Frances Gratton[56]Mrs Gratton provided a witness statement and oral evidence. The following points were made: (1) Mrs Gratton reiterated that the visit by Mr A M Turner, HMRC Officer, was most unpleasant and aggressive. Her reflection on the meeting at her home with Mr Turner on 6 June 2001 is as follows: She states at paragraph 10 of her witness statement:
“On reflection about a meeting, the focus of Mr Turner’s comments in the meeting was on Mr Moore. Mr Turner made an untrue and inaccurate statement, namely that Mr Moore “has stolen all your money”
. Mr Turner’s comments were neither structured nor coherent and his main concern seemed to be to implicate Mr Moore in wrongdoing in any way that he could find. He asked what we knew about Mr Moore and commented that he had in his possession papers pertaining to HMRC’s cases as Mr Moore”. (2) She confirmed that she visited the Guernsey property, which was leased, on two occasions and kept the lease for three months and no rent was paid after that date. (3) She said it was not their intention to sell their UK business but rather to set up an additional business in Guernsey. They decided not to go ahead with setting up that business when her husband became ill. Mr Gratton has Parkinsons disease. She confirmed that she was resident in the UK for tax purposes. (4) Her witness statement made the following points (paragraph 11 and 12): “It was Mr Moore who introduced us to Malcolm Tune who we found to be completely credulous, confident and believing, putting us on no outward pressure to buy. Mr Tune sent us information in advance about the product which given the advantages that it offered, sold itself. It was on the recommendation of Mr Moore and the confidence that we had in both Mr Moore and Mr Tune, who confirmed what Mr Moore told us, that we bought the product. The only objective behind us buying the product was to keep our pension fund within our estate. Mr Moore met with us to complete the application and we ensured that we fully understood the product before signing. In no way could it be said that we signed the documents blindly” (5) She confirmed that the purpose of entering into the scheme was to allow the pension fund pot to be kept within her estate and pass to her family. Evidence of Mr Jim Collis, Officer for HM Revenue and Customs attached to the Charities Assets and Residence Pension Schemes Office, Nottingham[57]Mr Jim Collis gave a witness statement and oral evidence he made the following point:(1) The Appellant’s case was selected for enquiry following a criminal investigation into the promoters of the arrangements.(2) He explained to the accountants for the Appellant, Clay Ratnage Strevens and Hills, on 7 July 2003 that the pension fund transfers were not authorised because the Appellant did not meet the terms of a transfer to be made as set out in the Reciprocal Agreement between Guernsey and the United Kingdom. He said that section 647 ICTA 1988 imposes a tax charge on a payment from an approved pension scheme, unless the payment is authorised by the rules of the pension scheme.(3) He confirmed that he did not liaise with the Guernsey Tax Authority because he did not feel it necessary to do so.(4) He said he did not know how the Guernsey authorities apply their rules and in that sense there were two different sets of rules, one for the UK and for Guernsey.(5) He said he did not feel that the Appellant were resident in Guernsey and further they did not leave the UK to take up jobs in that country.(6) He felt that given the representations made by Clark Middleton, advisers to the Appellant, that the requirements for the transfer of the pension funds had been met, Scottish Equitable acted in good faith in making the transfer. General conclusions[58]The Appellant were members of the Scottish Equitable Personal Pension Scheme which is approved under Part XIV of Chapter 1 of ICTA 1988. They were approached by advisers who were selling a product designed to release funds from their pension funds. The benefit of the product proposed was to avoid purchasing an annuity and to enable the funds which had been built up to form part of an individual’s estate . The working of the scheme is explained by Terry Moore, an adviser to the Appellant, in his witness statement. He said:
“The scheme worked firstly, by the client establishing a place of resident in Guernsey, or Alderney as a bailiwick of Guernsey, and then, secondly, through the client physically visiting the island. I established that a rental property was sufficient for the purposes of establishing a place of residence on the island, that the rent must be for a minimum period of one year, that three months rental must be paid in advance and that at some point the client had to visit the island for at least one night in the tax year in which the transfer was made. There was no requirement to continue with a place of residence in the island after one year when the lease could be cancelled. In order to implement the scheme for a client, it was necessary to apply to the life office where the pension fund currently resided …”
[59]Based on the advice which they received, the Appellant acquired a lease of a property in Alderney, which as far as the advisers were concerned, confirmed their status as Guernsey residents. They paid the rent for a period of three months, May to July 1996. The lease was actually signed on 15 March 1996 and they visited Alderney on 4 May 1996. For the avoidance of doubt, Alderney is part of the Bailiwick of Guernsey and, in that capacity, is subject to the same rules and regulations as applied to the Island of Guernsey. The Appellant also visited the Island for the last on 31 July.[60]The Appellant was advised that in order to become a member of a retirement annuity scheme in Guernsey, they had to be resident on the island. Their advisers were acting in accordance with the Explanatory Notes produced by the Income Tax Office, Guernsey in relation to Retirement Annuity Trust Schemes. The relevant part of the Notes on which the advisers relied in giving their advice to the Appellant is contained in paragraph 2(c) dealing with Approval-Member. It states: “To be eligible to join an approved RATS (Retirement Annuity Trust Scheme), an individual must be resident in Guernsey and the Administrator will, in the case of a new resident, wish to be satisfied that he has taken sufficient steps to indicate this intention. Broadly speaking, this means that the member must have been:-(a) physically present in Guernsey for 182 days or more in the year of charge; or(b) be present for 91 or more days, having maintained the accommodation in the Island for that period; or and(c) present in the Island at any time with the intention of setting up a dwelling place and actually doing so in that year or the following year. It is appreciated that some people may wish to effect a RATS before their residents status has been finalised. For this purpose the administrator will accept the purchase of property or the renting of premises on a long lease as sufficient evidence of intent, but he will not accept an accommodation address or hotel room, for example”. (This can be particularly relevant if an inward transfer payment is anticipated (see 4 below) and if the Administrator has any doubt he may wish to defer approval until the residents position has been finalised.)[61]The Explanatory Notes goes on to say at paragraph 4 (Contributions and Transfer Payments): “The conditions are the same as for Retirement Annuity Contracts (see separate booklet) and these are also contained in the law at section 157A; 157B and 157C so far as transfer payments are concerned. It should also be noted that prior approval is required for all inward transfer payment. Before approval is given, evidence may be required to show that the payment has been approved by the relevant authority in the transferors’ territory. In the case of transfers from the UK, this would usually take the form of approval issued by the Pension Schemes Office and the Occupational Pensions Board”.[62]The Explanatory Notes was issued by the Guernsey authorities and deal with how to become a member of the Guernsey Retirement Annuity Scheme.[63]It should be noted that the Notes do not have the force of law and at the very start of the Notes it states : : “These are intended to provide some background information in respect of Retirement Annuity Trust Scheme. They should not, however, be taken as a definitive state of the Law on any particular aspect, or in any particular case, and it is strongly recommended that the appropriate advice is taken before entering into a scheme”.[64]The authorities have indicated that the Notes do not have the force of law, are not definitive statements of the law and strongly recommend that independent advice be taken if a party intends to enter into a scheme and indeed on the transfer of a scheme. These are warnings to those wishing to effect a pension transfer. In any event the Notes deals with the requirements for becoming a member of a scheme in Guernsey. It does not deal with a transfer of funds from the UK though it alludes (paragraph 4 ) to authorisation being obtained in the transferor’s country in such case.[65]In order to effect a transfer of the Appellant’s pension funds, it is necessary that an application be made to the transferor company holding those funds , Scottish Equitable. Under the rules of their scheme it is provided that transfer payments must be to a Scheme approved by the UK Inland Revenue.[66]As stated earlier, the Pensions Office was given discretionary power to lay down conditions for the approval of Occupational Pension Scheme (section 591, ICTA 1988) as well as approval for a Personal Pension Scheme (section 631, ICTA 1988) as part of the exercise of this discretion and in order to give transparency to the process, the Commissioners issued an explanation as to how they would exercise this discretion.[67]As explained earlier, in order to transfer a member’s fund it had to be transferred to one of four types of schemes. The one type of scheme referred to was a scheme approved for the purpose by the Inland Revenue and approval had to be obtained by following the process set out by the Inland Revenue in its” literature”. The relevant Inland Revenue literature is the Inland Revenue Memorandum No 117 dated 13 January 1994 and issued by the Pensions Scheme Office. The relevant section of that practice note headed Reciprocal Transfer Agreements with Jersey and Guernsey refers to a revision of the existing Transfer Agreements with those countries and explains that the relevant document dealing with Guernsey is the Pension Schemes Office PS 121 which is headed “Arrangements for the transfer of pension rights between the UK and Guernsey”. PS 121 therefore reflected an agreed reciprocal position on pension transfer between the UK and Guernsey It also explained how the discretionary powers given to the UK Inland Revenue would be exercised and contemplates a transfer only where there is a change of job and the individual moves from the UK to Guernsey or vice versa. It states: “ Arrangements for the transfer of pension rights from the United Kingdom and Guernsey 68.. Arrangements have been made, on a reciprocal basis, to facilitate the transfer of pension rights where, on a change of job, an individual moves from Guernsey to the United Kingdom or vice versa. “[69]The fund transfer made by Scottish Equitable could not be allowed under the terms of its Scheme rules unless the transfer satisfied, inter alia, the Reciprocal Agreement in PS 121.[70]The Tribunal believes that the conditions set out in PS 121 were not met and therefore the transfer to the pension fund did not meet the requirements for being an authorised payment under the scheme rules . The Appellant had to comply with the scheme rules not only the Guernsey rules. The reciprocal rules required a change of job to effect a transfer of funds. The guidance provided by the Guernsey authorities in their Explanatory Notes, was only guidance. It stated as such and gave a health warning that its contents did not represent the law .The Appellant did not change jobs even if they became resident in Guernsey. A change of job required the cessation of their jobs in the UK and the taking up of new jobs or self employment in Guernsey, this did not occur. In the circumstances the transfer is not an approved transfer and so not allowed by the scheme rules and not authorised by Scottish Equitable.[71]The Explanatory Notes was a Guernsey document issued for guidance. It told half the story. It would be fatal to rely on that document alone when making a pension fund transfer from the UK to Guernsey. Advisers should have consulted PS 121/95. Mr Moore said he had not heard of that document. It represented an agreed position, signed by both parties and if satisfied, meant that the UK Inland Revenue had approved the transfer of funds without any further representations being necessary. When Clarke Middleton wrote to Scottish Equitable to say that Memorandum 117(IR 12 (1991)) had been complied with fully, Scottish Equitable rightly made the pension fund transfer. The letter gave them the authority to make the transfer of funds since it stated that the requirements for a transfer as required by the Inland Revenue, had been satisfied. It was sufficient to transfer on the face of the letter from Clarke Middleton. It proved to be an incorrect representation which made the transfer an unauthorised payment, even if it was made in good faith.[72]It is easy to see how this mistake was made. The Appellant contacted the Guernsey authorities and obtained the Explanatory Notes on pension transfers. They did what the Notes required and assumed that an approved transfer would then take place since they had met the conditions laid out. There was no requirement in the Notes for a change of job to have taken place. The Notes did not give the full picture. It made no reference to PS 121, a document agreed between Guernsey and the UK. This was the more important document as far as the transfer from the UK was concerned. It stated that the UK Inland Revenue only allowed transfers for people who were leaving work in the UK and going to live and work in Guernsey. This requirement was not satisfied and therefore the transfer was not authorised. Mr Craddock says that the Explanatory Notes “held out” a position which the advisors believed stated all the requirements for a transfer of funds to Guernsey. It is questionable whether this is accurate given that it is clearly stated that it was not the law and separate and independent advice should be taken. It also stated that “evidence may be required to show that the payment has been approved by the relevant authority in the transferor’s territory” (paragraph 4). Further, advisors should have consulted the scheme rules to clearly establish whether all requirements had been met to effect the transfer. The Tribunal does not therefore find merit in this argument.[73]The Inland Revenue approved a direction under Regulation 72(5) of the PAYE regulations on the ground that Scottish Equitable acted reasonable and in good faith when told by Clarke Middleton that the transfer met the conditions in Memorandum 117 and consequently the conditions in the Reciprocal Agreement They are not liable for the tax on the transfer. The tribunal agrees. The Appellant is liable for the full tax on the transferred sums as assessed under Schedule E. Penalties[74]The Inland Revenue have asked the Tribunal to find that the Appellant are liable to a penalty under Section 95, TMA 1970[75]The Commissioners have asked for the penalty regime under section 95 TMA 1970 to be applied. The section states that where tax has been loss through the taxpayer’s fraud or negligent in submitting a return or account the penalty is an amount equal to the tax loss. The penalty is in addition to making good the tax loss.[76]The Commissioners take the view that the Appellant entered into a tax avoidance scheme to transfer their pension scheme to Guernsey. They deliberately entered into a series of transactions intending to remove their pension fund outside of the UK tax regime. It is their contention that they did not become resident in Guernsey and rented a property with the sole purpose of showing an intention to be resident in Guernsey. It is their contention that they knew that they did not fill the conditions of the Reciprocal Agreement to transfer the pension scheme and they have therefore been negligent in delivering any incorrect returns.[77]In exercise of the Revenue’s power to mitigate penalties, there has been an abatement by 55% on the following basis:(1) Disclosure – 10% abatement (maximum 20%)(2) Corporation Tax – 25% abatement (maximum 40%)(3) Seriousness – 20% abatement (maximum 40%)[78]This leaves a penalty charge of 45%.[79]The Appellant, through Mr Craddock has said that the Tribunal should be mindful of the context in which discussions with the Commissioners have been conducted over many years. The Appellant have always given complete and total disclosure and entered into complete and total cooperation with HMRC. They acted on the basis of professional fee paying advice from recognised professional practitioners and responded to all the issues raised by HMRC and attended a meeting with two officers of HMRC Audit and Pensions Schemes Services with a view to resolving the matter that had arisen in the course of HMRC enquiries.[80]The Appellant spent a considerable amount of time and money in attending to the HMRC enquiries which were repetitive following involvement by different HMRC officers and offices.[81]The Appellant also make the point that their intention in entering into the arrangements with Guernsey was to legitimately move funds to an offshore pension scheme in accordance with UK tax rules in order to have greater flexibility in relation to their ultimate pension arrangements and their estate on death. They remain liable for income tax and inheritance tax in relation to any benefit, pension or capital sum that might ultimately be derived from the transfer of funds. They took professional advice to ensure compliance with the appropriate tax rules and are completely innocent of any wrongdoing.[82]The Tribunal does not believe that it would be appropriate, fair or reasonable in the circumstances for penalties to be levied in this case. If one defines negligence as a failure to do something which a prudent or reasonable person would do, then it is questionable whether the Appellant in this case have been negligent. They made full enquiries through their professional advisers in order to get the pension funds transfer properly and in accordance with the law. They reviewed the guidance in Explanatory Notes and legislations in both the UK and Guernsey and tried to confirm the current position with the Guernsey authorities. They operated in what they and their advisers thought to be a correct manner. They did not seek to turn a blind eye to obvious laws or requirements in the legislation. They made several efforts to meet and settle the matter with the Revenue and explained to the Revenue that they would be “quite happy to consider whether it would be appropriate to unravel the entire matter to produce the correct tax position”.[83]The Tribunal does not feel that they have sought to improperly reduce their tax liability, indeed it is questionable whether there has been a loss of tax in this matter other than any tax arising on the actual transfer itself which should have been withheld by the transferor company, subject to any dispensations offered by the Commissioners.[84]The Appellant was at some disadvantage in checking the records of their advisors and in providing information to the Revenue given the paperwork required to substantiate the position, had been confiscated by the Revenue in dealing with their enquiry into Terry Moore’s affairs.[85]The course of action taken by the Appellant was not intended to avoid, evade or indeed to save tax but simply to arrange their affairs to allow different planning with respect to deferred annuities. The Appellant would say, and the Tribunal believe there is some merit in that argument, that they were not properly treated by the Revenue especially with regards to the unannounced visit of Mr Turner ,for which the HMRC had to issue an apology to the Appellant.[86]The Tribunal is also sympathetic to the fact that the Appellant in this case been honest and compliant taxpayers for several years. They are now in their mid to late 70s with one of the Appellants, Mr Gratton in poor health as a result of Parkinsons disease.[87]The Appellant seems to have fallen into the hands of a convicted fraudster, Mr Malcolm Tune ,who perhaps did not act in their best interest. Mr Terry Moore , their other advisor, seemed a perfectly honourable gentleman, who in his oral evidence explained that he had gone to great lengths to check the relevant legislation and make requisite due diligence enquiries regarding the scheme, before recommending it to the Appellant.[88]The Appellant in this case have disclosed to the Commissioners as much information as they could have disclosed, they acted with cooperation, they understood the seriousness of the matter. Full disclosure has been made since the start and cooperation has been from the outset. It is unfortunate that the Appellant had not consulted Mr Ian Laird, their accountant for several years, before entering into the scheme. This may be an oversight because they believed that they had other professional advisers who were able and competent to advice on the matter. Final conclusion[89]In the circumstances the Tribunal finds that the payments are taxable under Schedule E and that Mr Gratton is liable to Schedule E charge of £58,650 for 1996/97 and Mrs Gratton to a charge of £27,350 also for 1996/97. The assessments therefore stand. The Tribunal find that there should be no penalties or interest, for the reasons given above, in the circumstances.[90]The Tribunal would also like to commend Mr Craddock for presenting a very thorough case on behalf of the Appellant.[91]Appeal dismissed (save as to findings on penalties)[92]This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. DR K KHAN TRIBUNAL JUDGE RELEASE DATE: 28 October 2010