O'Mara v Revenue and Customs (INCOME TAX/CORPORATION TAX : Pension scheme) [2017] UKFTT 91 (TC)
FTT-Tax
O'Mara v Revenue and Customs (INCOME TAX/CORPORATION TAX : Pension scheme)
[2017] UKFTT 91 (TC) · 2016-11-09
[6]FA 2004 contains a prescriptive regime in relation to the payments that registered pension schemes are authorised to make and the consequences of unauthorised payments. The rationale is to ensure that the tax reliefs and exemptions in respect of contributions to registered pension schemes are available only to the extent that the pension schemes genuinely make provision for the benefit of members on retirement, subject to various statutory limits. The compliance regime and reporting requirements set out in FA 2004 are directed towards the same end. …………[35]HMRC submitted that one of the reasons for the tax charges which arise where a pension scheme makes unauthorised payments is to safeguard the tax relieved funds in the scheme for the provision of retirement benefits. In relation to loans the provisions seek to ensure that funds are not loaned in circumstances where there is a risk they might not be repaid. We accept that submission. …………[56]We note that the total charge to tax in relation to an unauthorised employer payment is 55% comprising the 40% charge on the employer and the reduced 15% charge on the scheme administrator. It is notable that the 40% charge is on the recipient of the payment, rather than on the Scheme. The total charge is the same level of charge which arises where funds are paid out of a scheme on the death of a member or where the lifetime allowance is exceeded. Both parties agreed that the 55% charge is a broad measure by which the tax relief on contributions and tax free growth are recovered. In that sense, the scheme sanction charge, being part of an overall charge of 55% does appear to be a charge to tax rather than a penalty.[57]In the event however we do not need to determine whether the scheme sanction charge is properly to be viewed as a charge to tax or a penalty for the purposes of the Convention. We do not consider that on any view it is disproportionate, still less that it is devoid of reasonable foundation and outside the wide margin of appreciation enjoyed by Parliament. As Mr Clarke submitted the charge is there in part to act as a deterrent against unauthorised payments. It seeks to protect the assets in pension schemes and to ensure that the tax reliefs given to pension schemes accrue for the provision of retirement benefits to members. We are not satisfied that it is in any way unreasonable or disproportionate, either generally or in the specific circumstances of the present appeal. In reaching this conclusion we consider that the factors referred to above in the context of relief under section 268 are equally applicable in testing the proportionality and reasonableness of the charge for the purposes of Article 1. 106. In Peter Browne v HMRC [2016] UKFTT 595 (TC) Judge John Walters QC held that payments received by a taxpayer from two pension providers were unauthorised member payments chargeable to tax at 40% under section 208 FA 2004. However, the appellant’s intention to transfer the pension funds to another pension scheme, which he put into effect three years after receiving the payments, justified the quashing of the unauthorised payments surcharge which had been imposed by HMRC. At paragraphs 70 to 71 of the decision the Judge stated: 70. In the context of deciding whether, in all the circumstances of the case, it would not be just and reasonable for Mr Browne to be liable to the unauthorised payment surcharge in respect of the payments by the Pearl and Scottish Life, we consider that we should have regard to the discernible purpose of the surcharge. 71. We consider that the purpose of the surcharge is to penalise unauthorised payments where they are made in order to frustrate the purposes of the pension scheme tax regime and abuse its tax reliefs and exemptions. Where, as we consider is the case with these appeals, the unauthorised payments were not made for that reason, and the funds concerned remain vested in a registered pension scheme (albeit with a three year interlude under the personal control of Mr Browne), we find, having considered all the circumstances, that it would not be just and reasonable for Mr Browne to be liable to the unauthorised payment surcharge in respect of the payments by the Pearl and Scottish Life, and we so decide. Among the circumstances relevant to our decision is the fact that at least some of the three year delay was caused by Mr Browne’s anxiety and HMRC’s criminal investigation into the matter. 107. Extracts from the background notes to clauses 197 and 255 of the Finance Bill 2004, forming part of the explanatory note, state as follows: Clause 197 ………………………. 12. This Part of the Finance Bill imposes four new tax charges on funds held by, or payments made out of, registered pension schemes in certain circumstances. These charges are intended to prevent abuse by the scheme administrator, any member or any employer sponsoring the scheme of the benefits obtained from the tax relief provided to such schemes. 13. Registered pension schemes will benefit from tax relief on contributions made into the scheme and on income or gains made on investments held within the scheme. Where a registered pension scheme does not comply with the requirements of this part of the Act a charge will be imposed on any scheme funds that cease being held by a registered pension scheme. The effect of that charge is to remove the tax benefits received on that fund or that part of it that is removed from the scheme. 14. These charges are the: · unauthorised payments charge 197; · unauthorised payments surcharge 198; · scheme sanction charge 228; · de-registration charge 231. 15. The “unauthorised payments charge” will impose a tax charge on any scheme member or sponsoring employer who receives a payment or benefit from the scheme that is not authorised by this part of the Finance Act. That person will be liable to a charge, based on the amount of the payment received by them, or paid to another person for that member or employer's benefit. The rate of tax is at 40%. 16. The “unauthorised payments surcharge” is a further tax charge, paid in addition to the unauthorised payments charge. It can be imposed where the value of the payment was 25% or more of the fund value. The unauthorised payments surcharge will be 15%, bringing the total tax charge to 55%, to reflect the higher level of tax relief likely to have been received on such a large amount of the scheme’s fund. ………………… Clause 255 1. This clause provides an opportunity for a person or a scheme administrator to apply to the Inland Revenue for discharge from their liability to pay either the unauthorised payments surcharge or the scheme sanction charge (as appropriate) in a case where it would not be just and reasonable to impose it. …………………………… 11. Under the new tax regime for pension schemes, the Government wishes to set out clear and unambiguous rules in legislation, including instances where tax charges and surcharges fall due. However, there may be cases where it would not be just nor reasonable to impose such charges. This Clause allows for the person or scheme administrator to be discharged from liability to pay the charge or surcharge where in all the circumstances of the case it would not be just and reasonable to impose it. This allows for a flexible approach where justified. ………………………. Submissions Appellants108. Mr Rooney submitted that the appellants disagree with any assertion that they intended to take part in a pension liberation scheme. They believed they were transferring funds from their existing lawful pensions schemes to another lawful pensions scheme. Mr O’Mara believed the new pension was, like a Self Invested Personal Pension (SIPP) and that the capital in the BPT could be loaned to his company and paid back into their pension fund in due course. Their treatment of the funds in their accounts accords with that belief. They simply do not know where to return the sums but they remain accounted for as loans.109. Mr Rooney submitted the Tribunal should be careful not to examine the case with the benefit of hindsight but examine the beliefs, understanding and actions of the appellants at the relevant time. The appellants took advice and information from a fully regulated advisor and at the time they believed a seemingly qualified advisor that this was the case. They did check the credentials of the advisor. A lot of people who found themselves in similar position of the appellants and were taken in by the advice that Mr Lau was giving.110. He submitted that the appellants made sure they took reasonable steps and conducted due diligence. They ensured they dealt with a regulated firm. They did not have the detailed technical knowledge to know for sure if the BPT was compliant. Mr O’Mara did flag up a similar pension scheme and was reassured by Mr Lau in the email of June 2011. At the material time they considered they were being advised by an expert and trusted advisor. The absence of taking advice from independent accountants or lawyers should not be held against them.111. Between signing up to the BPT in September 2010 and receiving their first funds in December 2011, the appellants were worried as they had not received any of their monies in loans. They questioned the delay in July 2011 at the meeting. In July 2011 they were assured matters were proceeding. Whether they should have cancelled the transfers at this time depended on the ‘alarm bells ringing in their minds’ and at this stage. Having been assured all was in order they were prepared to proceed. Many of their pension policies had already been transferred, unknown to them, beginning on 20 June 2011.112. They had been convinced by Mr Lau and told that the scheme was compliant with the law. The appellants did not recognise the loans as unauthorised payments but accept they are and cannot appeal the 40% unauthorised payment charge. The appellants always believed that they could use the funds for their business and return them to their pension pots.113. Mr Rooney submitted that the surcharges are not just nor reasonable for the following reasons. The payments to Biz-Works Ltd were genuine commercial loans. Owing to the lack of communication from Mr Lau the appellants’ company has not been able to repay the debts. As such they continue to recognised the debts in the company’s accounts and entitlement to the funds has not passed to Biz-Works.114. He submitted that the value of the pension fund has not decreased as interest paid by Biz-Works has increased the value of that fund which is available to be returned to an authorised pension scheme. The appellants were misled by Mr Lau and his associates, who they understood to be regulated pensions and taxation experts. They trusted the veracity of the advice they received. They did not seek to circumvent any tax obligation and they were convinced that what they were doing was compliant with HMRC guidance and law.115. Furthermore Mr Rooney submitted that the surcharges represented a substantial over-recovery of the tax relief that the appellants would have received. Mr Rooney submitted that there was evidence from the appellants about both their incomes and levels of tax. In the periods they built up their original pension schemes they were generally basic rate taxpayers. Mr O’Mara was only occasionally a higher rate taxpayer so the tax relief on his total pension fund would be substantially less than 40%. So Mr Rooney contended that the HMRC would over-recover tax relief by applying the unauthorised payments charge.116. Therefore it was submitted that the unauthorised payment charges of 40% would be more than sufficient to compensate the Crown for the relief enjoyed on the transfer into the appellants’ pension schemes. Mr Rooney submitted that a surcharge of a further 15% is excessive and is far greater than the relief or other benefit the appellants would not have come close to enjoying. It duly penalises the appellants.117. Mr Rooney submitted that the aims of the charge and sur-charge under the Finance Act 2004 were to compensate the Crown. Furthermore he relied upon Browne v HMRC which lent weight to the submission that where there was no intention to abuse or frustrate the secured tax reliefs by the appellants the surcharge was akin to a penalty.118. The appellants had acted in a reasonable fashion and therefore it was neither just nor reasonable to penalise them with surcharges. He relied upon the decision in Herefordshire Property Company Ltd v HMRC [2015] UKFTT 79 at paragraphs 44-53 to submit that the test of negligence is whether the appellants failed to do something that a reasonable taxpayer would have done, or did something that no reasonable taxpayer would have done. He compared the factual circumstances of that case, where the appellants were found not to be negligent, as being comparable to the appellants’ position.119. Finally, it was submitted that the Tribunal should find it was not just nor reasonable to impose the surcharges. The appellants had no history of tax irregularity. They have been compliant and law-abiding and tax payers. They had no adverse dealings with HMRC, they had not filed the returns late or failed to make payments. They could not reasonable have known the scheme was non-compliant. He cautioned the Tribunal against applying hindsight. He submitted that the surcharges were excessive and punitive. HMRC120. Mr Bradley, for HMRC, submitted that it was common ground that the payments made to the appellants’ company were not authorised payments for the purposes of the Finance Act 2004. The issue was whether under section 268(3) it would not be just and reasonable in all the circumstances to impose the surcharges. Section 269 of the FA 2004 gives the Tribunal full appellate jurisdiction to determine the issue and not simply a supervisory jurisdiction.121. Mr Bradley submitted that the Tribunal should be familiar with applying the test of what is just and reasonable. The Tribunal is not required to make a finding of any bad faith or dishonesty against the appellants.122. He submitted it would be wrong to characterise the surcharge as penal. He relied on the decision in Willey at paragraphs 6, 35, 56 and 57. Even were the surcharge a penalty for the purposes of the Human Rights Act, it is not disproportionate. He asked the Tribunal to examine the statutory scheme and policy background and relied upon the explanatory note and background notes to the Finance Bill as set out above. He submitted that the mischief the surcharge is designed to address is the recouping of tax relief – not the imposition of a penalty.123. He relied upon the analogy with Willey where the total charge and surcharge equated to 55%. He submitted that the appellants would not simply have benefitted from tax relief of up to 40% but also have received tax free growth – more than the merely the relief the appellants received on the payments into their pension schemes. He submitted the legislation adopts a rough and ready approach to calculating the tax repayable.124. He relied upon paragraph 71 of the decision in Browne . He submitted that the tribunal was entitled to focus on the purpose of the unauthorised payments and not just the mental state of the person who made the payments (the loans in this case) or incurs the liability. Examined objectively, the purpose of the payments was to get around the restrictions on the use of pension funds in the appellants’ case.125. The effect was objectively to take money out of their pension funds where they could not normally and lawfully do so. This was the case irrespective of the appellants’ intent and whether they intended to involve themselves in a pension liberation scheme. The appellants knowingly took part in a scheme whose intention was unauthorised even if they did not share that intention. The intentions of the persons behind the BPT – the orchestrator or promoter of the scheme being Mr Lau – was to devise a scheme with the intention of extracting funds from pensions.126. He submitted that the Tribunal should frame the just and reasonable question by considering three interlocking points:127. First, because the policy objective was primarily to recoup tax rather than punish the circumstances in which the unauthorised payment was made, the circumstances in which it would not be just and reasonable to impose a surcharge must be quite limited. He submitted that the Tribunal would have to find it was just and reasonable for the appellant not to repay tax that they ought to have paid.128. Second, derived from Browne, the Tribunal was not simply looking at the state of mind of appellants but look at the purpose of the unauthorised payments. He submitted that the Tribunal would have no trouble in finding that the purpose of the payments was to avoid the restrictions of pensions legislation.129. Third he submitted that a surcharge is not penal. That means the Tribunal should not be distracted by looking at the test of negligence or dishonesty and whether it applies to the appellants’ actions. To reduce the test only to the appellants’ state of mind and whether they had been dishonest or negligent would be to restrict and ‘cut down’ the scheme.130. In order to uphold the surcharge as just and reasonable he submitted that the Tribunal does not have to go so far as to find that a tax payer has entered into an arrangement which he or she knows or understands a) will take some value out of his pension before retirement date; and b) that the purpose of the scheme is to extract value without being liable to tax charges that would follow. However, if the Tribunal is satisfied of both points it would be sufficient to render the surcharge liability just and reasonable.131. The purpose of payment is viewed to be objectively. Was this the kind of payment designed to avoid the normal tax charge?132. One relevant circumstance may be that a taxpayer knowingly entered into a scheme and, contrary to an agent’s advice, it was unauthorised or unlawful. However, in these circumstances the taxpayer would have remedies against their agent. If the tribunal was to find it would be unjust and unreasonable for a taxpayer to pay a surcharge where they understood the arrangement but had relied on incorrect advice that the scheme was authorised, it would be a massive fillip to those who promote such schemes. Unscrupulous advisers would be able to say to potential clients considering these schemes that the worst that would happen is that there would be an unauthorised payment charge to recover the tax relief if the scheme was held to be unauthorised.133. Even if a taxpayer took legal, accounting and tax advice that the scheme was authorised or appropriate, this of itself should not be sufficient to rely upon to discharge a surcharge as not being just and reasonable where the payment was latterly found to be unauthorised.134. Mr Bradley submitted that irrespective of his submissions on principle there were various factual submissions as to the conduct of the appellants that rendered it just and reasonable in the circumstances for the surcharges to be upheld.135. One argument on behalf of the appellants was that they did not really know what was going on and relied on Mr Lau who turned out to be unreliable and they were duped. They also said that they took appropriate steps to vet Mr Lau and the scheme.136. However, Mr Bradley relied upon the following points against the appellants in considering all the circumstances of the case.137. Mr and Mrs O’Mara did not take reasonable action in relation to their dealings with Mr Lau and entering the BPT. The following points evidence this.138. There were ‘warning bells’ right from the start but they chose not to act upon them. At the meeting with the appellants in July 2009, Mr O’Mara accepted Mr Lau was not providing them with independent advice. Mr O’Mara accepted that he ought to have a scheme proposal and could have had the scheme reviewed by an independent professional. He accepted he ought to have asked Mr Lau whether he could back up his assertion by pointing to something from HMRC to say the scheme was compliant. It is not that HMRC would have given a ruling upon the scheme but that Mr O’Mara ought to have asked what Mr Lau had done to verify or support his belief it was compliant and the grounds upon which he relied.139. One part of the scheme was based on the FX trading account generating the interest on the loan payments from the BPT to the appellant’s company. The rate of return by the FX trading implied by what Mr Lau had told the appellants was very impressive to say the least. That such a trader had the skills and knowledge and trading plan to do this was surprising but Mr O’Mara was not able to say that he tried to find out from Lau what was the basis of the ability to make such a high return. Whichever way it was to be generated, the interest on the loan from Salmon Enterprises to the appellants’ company was either to be paid out from their own pension fund or a segregated part of it or by Mr Lau from his fees. None of these arrangements made sense. Nor should it have made sense to persons such as the appellants whose business it was to make loans.140. In relation to the arrangement in September 2010 when Mr and Mrs O’Mara signed up to the scheme, they did this without being given copies of any signed documents despite entirety of their pensions having to be transferred into the BPT. They had no signed loan, pensions or trust documents and still did not have these nine months later or ever. In the following months, they had chased Mr Lau to no avail for the documents and the transactions had not progressed either. The appellants were right to be concerned.141. In relation to the email Mr O’Mara sent to Mr Lau on 22 June 2011 regarding his concern about a pension liberation scheme, this evidenced that by this stage Mr O’Mara had been concerned regarding the BPT. The mechanics of a loan being made in respect of the member was a shared feature with the BPT. Mr O’Mara put this to Mr Lau in his email. The text of the email in reply from Mr Lau was not such as anybody should have reasonably taken to be reassuring. Mr Bradley submitted that Mr O’Mara could not say positively that he had discussed his concerns with Mr Lau beyond that email. This was another red flag.142. Mr Bradley submitted that, as a matter of fact, at the time of late June / early July 2011 only half of the appellants’ pensions had been transferred into the BPT scheme. The appellants could have attempted to stop the remaining half of the transactions proceeding. In a sense, this was not the main point. As at the end of June 2011 the appellants did not know if any of their funds had been transferred into the Salmon Enterprises pension scheme. There was no reason that the appellants could not have aborted the transaction. All of the warnings could reasonably have alerted the appellants not to enter into the scheme which resulted in their receiving unauthorised payments.143. The appellants’ dealing with Mr Lau involved them seeking to obtain introducer commissions for bringing Mr Lau and the BPT to the attention of their clients. Not only would the appellants have understood in broad terms the nature of the scheme in terms of extracting funds from their pensions but they sought to make money by introducing the scheme to other clients.144. Mr Bradley submitted that it would not be sensible for the Tribunal to find it was not just and reasonable to impose the surcharge because the appellants had been led into the scheme by Mr Lau. Mr O’Mara himself sought to introduce others to the scheme for his own commercial benefit. The email from Mr O’Mara of 22 June 2011 does not read as the email of someone concerned about the propriety of the scheme, even after a nine-month delay and absence in progress of the transaction and the absence of supporting documentation. The email does not read as if Mr O’Mara was greatly concerned. Rather it reads as if Mr O’Mara’s relationship with Mr Lau was that of two people enjoying a mutually beneficial business relationship rather than Mr O’Mara as an innocent victim.145. The scheme depended on the existence of a loan agreement from Salmon Enterprises to the appellants’ company, Biz-Works, which was never provided. In the absence of loan documentation, Mr O’Mara created his own ‘loan agreements’ which were not acknowledged by Mr Ray or Mr Lau. Furthermore, Mr O’Mara never had any reason to believe that the loans had been entered into or did exist with GG Blue Sky or Goswell Square Capital who actually made the payments rather than Salmon. Mr O’Mara’s ‘loan agreements’ were still in the name of Salmon Enterprises.146. Mr O’Mara received no contact from the people who were to make the loan at Salmon Enterprises nor the other two companies which actually made the payments in the three tranches between December 2011 and March 2012. The absence of any loan agreement and contact from any person making the loan or the payments should have provided an enormous red flag to the appellants. However, by that time the appellants were simply focused on where their money had gone and when they were to receive it - nothing else.147. Mr Bradley submitted that the appellants knew that the purpose of the scheme they entered into was to take money out their pensions which would normally render them liable to tax charges.148. He also submitted that they had acted unreasonably. Irrespective of their state of knowledge, if one were to look at the appellants’ conduct it is not sufficient to discharge their liability. Mr Bradley submitted that in all the circumstances of the appellants’ case it would not be just and reasonable for the surcharges to be discharged. Discussion and Decision149. The Tribunal largely agrees with the submissions made on behalf of HMRC.150.Section 269(6) of the Finance Act 2004 confers upon the Tribunal full appellate jurisdiction to determine whether the unauthorised payments surcharges ought to have been discharged. The ground for discharge is whether it would not be just and reasonable in all the circumstances for the appellants to be liable to the unauthorised payments surcharges in respect of their payments under section 268(3) of the Act.151. The burden of proof is upon the appellants to bring evidence to satisfy the Tribunal that it would be not be just and reasonable in all the circumstances for them to be liable to the surcharges.152. The statutory test will not benefit from unnecessary gloss. It requires the Tribunal to examine all the circumstances and decide whether it would be just and reasonable for the appellants to be liable to surcharges.153. It does not require any finding of dishonesty or negligence on part of the appellants. It allows the Tribunal to examine all the circumstances surrounding the making and receipt of the unauthorised payments in each appellant’s case. This in turn allows the Tribunal to examine an appellant’s conduct or any other relevant mitigating circumstances pertaining to the payments or the appellant’s circumstances. It also allows the Tribunal to take account of the statutory scheme and mischief the surcharge is designed to prevent.154. The Tribunal is of the view that it would be wrong to characterise the surcharge as penal - the surcharge is a tax charge designed to recoup tax relief on contributions and tax free growth. This is for the same reasons suggested in the decision on unauthorised employment payments in Willey at paragraphs 56: Both parties agreed that the 55% charge is a broad measure by which the tax relief on contributions and tax free growth are recovered. In that sense, the scheme sanction charge, being part of an overall charge of 55% does appear to be a charge to tax rather than a penalty.155. The rationale appears at paragraph 16 of the background note to Clause 197 of the Finance Bill 2004: The “unauthorised payments surcharge” is a further tax charge, paid in addition to the unauthorised payments charge. It can be imposed where the value of the payment was 25% or more of the fund value. The unauthorised payments surcharge will be 15%, bringing the total tax charge to 55%, to reflect the higher level of tax relief likely to have been received on such a large amount of the scheme’s fund.156. The Tribunal is not required to enter into a detailed attempt to calculate whether 55% does exactly represent or equate to the value of tax relief and tax free growth on the appellants’ pensions. We there resist Mr Rooney’s invitation to enter into a notional calculation of what the tax relief on contributions and tax relief amounts to. As Mr Bradley submits, this is a broad or ‘rough and ready’ measure. The surcharge is aimed at payments which are 25% or more of the value of the pension fund. In the appellants’ case their unauthorised payments (the loans to their company Biz-Works) represented the entirety of the pension funds held by Salmon Enterprises. The unauthorised payments also represent the vast majority of the value of their previous authorised pensions funds (subject to WFM’s fees).157. We therefore do not consider the surcharges amount to penalties in the circumstances of this case.158. However, even if the surcharges were penalties in the circumstances of this case we do not consider it would be disproportionate for the purposes of the Human Rights Act for the appellants to be liable to them. This is for the reasons set out in Willey at paragraph 57 in relation to the proportionality of the legislative scheme: 57. In the event however we do not need to determine whether the scheme sanction charge is properly to be viewed as a charge to [image removed] tax [image removed] or a penalty for the purposes of the Convention. We do not consider that on any view it is disproportionate, still less that it is devoid of reasonable foundation and outside the wide margin of appreciation enjoyed by Parliament. As Mr Clarke submitted the charge is there in part to act as a deterrent against unauthorised payments. It seeks to protect the assets in pension schemes and to ensure that the [image removed] tax [image removed] reliefs given to pension schemes accrue for the provision of retirement benefits to members. We are not satisfied that it is in any way unreasonable or disproportionate, either generally or in the specific circumstances of the present appeal. In reaching this conclusion we consider that the factors referred to above in the context of relief under section 268 are equally applicable in testing the proportionality and reasonableness of the charge for the purposes of Article 1.159. Furthermore, even if the surcharges applied to the appellants are to be categorised as penalties, they are reasonable and proportionate in all the circumstances of the case. This is for the same reasons set out below in relation to them being just and reasonable.160. We consider that the appellants have not satisfied us that it would not be just and reasonable for them to be liable to the surcharges in all the circumstances. This is for the following reasons.161. The tribunal is entitled to take into account the purpose of the unauthorised payments and not just the mental state of the person who made the payments (the loans in this case) or incurs the liability.162. Examined objectively the purpose of the payments to the appellants was to circumvent the restrictions on the use of their pension funds which otherwise pertained. The effect was objectively to take money out of their pension funds where they could not normally and lawfully do so. This was the case irrespective of the appellants’ intent and whether they intended to involve themselves in a ‘pension liberation scheme.163. The appellants knowingly took part in a scheme whose intention was unauthorised even if they did not share the intention. The intentions of the persons behind the scheme, appearing to include Mr Lau, was to devise a scheme designed to take funds out of pensions schemes and avoid incurring tax charges. The intention of the person making the payments to the appellant’s company, Salmon Enterprises, was the same.164. Whatever their intent, the appellants knowingly took part in a scheme whereby they accessed the value of pensions prior to normal retirement age. In addition, they must have realised that entering any scheme in which it was proposed that no tax charges would result would come with some risk.165. The Tribunal agrees with the thrust of Mr Bradley’s submissions.166. First, because the policy objective was primarily to recoup tax rather than punish the circumstances in which the unauthorised payment was made, the circumstances in which it would not be just and reasonable to impose a surcharge may be limited. The surcharge only applies where a significant proportion of the pension fund’s value (25% or more) is represented by the unauthorised payment. As above, the unauthorised payments represented the whole of the appellants’ pension schemes.167. Second, derived from Browne the Tribunal was not simply examining the state of mind of appellants but the purpose of the payments. As above, the purpose of the payments was to avoid the restrictions of pensions legislation.168. Third, in order to uphold the surcharge as just and reasonable the Tribunal does not have to go so far as to find that a tax payer has entered into an arrangement which he or she knows, understands or believed to have constituted unauthorised payments for the purposes of the legislation.169. Of itself, an honest but mistaken belief of a taxpayer, based on the advice of a scheme provider or otherwise, that that the arrangement is authorised and compliant is not sufficient to render liability to a surcharge as unjust or unreasonable. Otherwise it would encourage the promoters of unauthorised schemes, whatever the promoter’s beliefs. Unscrupulous advisers and promoters, in recommending such schemes, would be able to advise clients that the worst that would happen if a scheme turned out to be unauthorised is that HMRC would impose an unauthorised payment charge to recover the tax relief.170. Where a payment turns out to be unauthorised, the fact that a taxpayer has taken legal, accounting or tax advice that the scheme was legitimate or authorised should not be sufficient, of itself, to make it unjust or unreasonable to impose a surcharge. The taxpayer cannot rely on such advice as conclusive. Of course, it may be a relevant circumstance but it would not be determinative. The nature and extent of the advice and other circumstances of the case would have to be taken into account. In any event, the appellants took no such advice.171. Irrespective of these points of principle, the Tribunal considers it just and reasonable in all the circumstances for the surcharges to be upheld. The following factors as to the conduct of the appellants are taken into account.172. The tribunal is satisfied that the appellants were aware that by entering into the BPT they were to benefit from value from their pensions before retirement date. This is despite their evidence that they believed they were not extracting the value for good but simply receiving it in a loan which they believed would be repaid and to which no tax charges would apply. It is unnecessary to decide whether they believed the purpose of the scheme was to extract value without being liable to tax charges that would follow. The Tribunal is prepared to accept they held an honest belief that the scheme and the payments were compliant and authorised and that no tax charges would follow. Nonetheless this belief was mistaken.173. The appellants’ belief was not based upon reasonable grounds. The appellants did not take significant steps to mitigate the risk that they should reasonably have realised they were incurring by entering into such a scheme. They simply relied upon an adviser who had a financial interest in selling them a product and the limited due diligence conducted was not a reasonable response to the risk they incurred.174. For example, they did not take any independent advice, whether from a lawyer, accountant or tax adviser upon the scheme. They did not seek to examine or inspect the grounds or advice upon which Mr Lau said he believed the scheme was authorised. They simply relied upon Mr Lau and now believe that he ‘duped’ them. The appellants’ lack of reasonable care has to be viewed not simply as participants in the BPT scheme but also in the context of them seeking to introduce the scheme to others. A reasonable tax payer should wish to have a high degree of confidence, based upon independent and substantial grounds, that a scheme and payments are authorised and compliant before entering agreeing to them or introducing them to others.175. One argument on behalf of the appellants was that they did not really know the detail of what was going on. The Tribunal considers that it would have been reasonable for them to make themselves familiar with the detail. They relied on Mr Lau who turned out to be unreliable and they were duped. They also say that they took appropriate steps to vet Mr Lau and the scheme. However, as set out above in relation to the lack of advice sought, Mr and Mrs O’Mara did not take reasonable action in relation to their dealings with Mr Lau and entering into the BPT.176. The Tribunal considers that in addition to the lack of reasonable steps taken by the appellants, the following matters were available to the appellants contemporaneously and it is not considering these with the benefit of hindsight.177. There were ‘warning bells’ from the outset as to the compliance of the scheme. Mr O’Mara ought to have known that he was operating in an area whereby pension value was to be extracted, or benefitted from, before the age of 55. Entering into this arena presented a degree of risk. Indeed, Mr O’Mara did seek to perform some due diligence on Mr Lau which indicates that he was alive to some risk.178. At the meeting in July 2009. Mr O’Mara accepted Mr Lau was not providing him with independent advice. On that basis that he might reasonably have sought to the advice by independent professional. At the very least he might have asked Mr Lau to evidence his assertion by pointing to some written confirmation from HMRC or an independent adviser to Mr Lau that the scheme was compliant. The appellants might reasonably have asked what Mr Lau he had done to support his belief it was compliant based on good grounds. The appellants might reasonably have asked to see any supporting evidence for the belief.179. One part of the BPT and pension scheme was based on the FX trading account generating the 5% interest on the loans. The rate of return by the FX trading account implied by what Mr Lau had told the appellants would have to be high. If all of the sums accounted for as WFM’s fees, around 17% of the original pension value, were invested in the FX account, then the account would still need to generate at least 25% returns every year in order to service the 5% annual loan interest. However, if all the fees were invested in the account then there would be no fee available to WFM which would be uncommercial. If only 50% of the fees (around 8.5% of the pension fund) were to be placed in the FX account then this would need to generate over 50% annual returns to service the loan interest.180. These rates of return would be very high. Mr O’Mara was not able to say that he tried to find out from Lau what was the basis of the ability to make such a high return or question the commerciality of the arrangement. In the email sent by Mr O’Mara on 27 September 2010, received by the Tribunal after the hearing as a result of its direction, we do see that Mr O’Mara was indeed alive to the fact that the rate of return from FX trading would have to be uncommercially high (Mr O’Mara calculated it as 300%) and that he questioned this. Mr O’Mara did not give evidence at the hearing nor supply any later evidence that he obtained any satisfactory answer from WFM to reassure him about this.181. Whichever way it was to be generated, the interest on the loan from Salmon Enterprises to the appellants’ company was either to be paid out from their own pension fund or a segregated part of it or by Mr Lau from his fees. None of these arrangements made commercial sense. It could reasonably be expected that the recipient of the loan, the appellants’ company, rather than the lender, was to bear the responsibility for meeting the interest payments. No questions appear to have been asked of Mr Lau regarding the arrangements which deviated from this expectation. It is to be noted that the appellants’ business was to make loans so they would have had some insight into lending practices.182. The total ‘cost’ of the loans of around £73,000 to the appellants’ company was around £15,500 in fees. Neither the appellants nor the Tribunal were told what was the term of the loan agreement but if the loan term was one year it would approximate to 20% per annum. This would be expensive. If the loan term was 10 years it would be around 2 % per annum. This would be reasonable. The percentage per annum would decline the longer the loan ran and become more and more unrealistic. The fact is that the appellant had no idea of the loan terms and created a document himself. The FX trading account be equated to a "black box" which surprisingly guarantees to generate 5 % interest come what may. In layman’s terms the appellants appear to have received an open-ended loan for a total cost of £15,000 to the business. This would appear to be very beneficial.183. A sophisticated and a financially astute person such as the appellants, those in the business of making loans, should have realised that a loan without repayment terms was not commercial. In fact there was no commitment by appellants to make good any shortfall in the expected 5% return in the FX trading account to account for the loan interest. It appears there was no commitment to, or liability of the appellants on receipt of the loans – hence Mr O’Mara realised he should attempt to create one by drafting ‘loan documents’ between December 2011 and March 2012.184. It appears that the appellants’ initial motivation was to introduce, or in reality, to promote, the scheme to others for profit. This provides all the more reason as to why they would might have wanted to investigate the detail and supporting grounds and not simply rely on assurances. Indeed, the mailshot email of September 2009 from Mr O’Mara at no point advises potential customers to do their own investigations and due diligence into Mr Lau.185. Initially the appellants were to seek to profit from introducing the scheme to their clients. In due course, they also sought that their business profit from loans made under the scheme.186. As of September 2010 the appellant’s signed up to the scheme without retaining any signed documents either in relation to BPT or any loan agreement to their company. This was despite the entirety of their pensions having to be transferred into the BPT. They had no signed loan or trust documents and still did not have these, whether nine months later or even today. It might come as a surprise to a reasonable taxpayer that it was investing all its pension in a scheme but was given no copies of any paperwork to evidence the transaction.187. It would be reasonable to expect any person entering into such arrangements to be given copies of the relevant signed agreements and it is surprising that the appellants did not demand to receive these immediately but were prepared to wait for their provision. In the following months they had chased Mr Lau to no avail for the documents and the transactions had not progressed and the loan had not been received during this time either. They were right to be concerned. This should have set further alarm bells ringing as to the nature of the transactions they had entered into.188. The email Mr O’Mara sent to Mr Lau on 22 June 2011 regarding a pension liberation scheme evidenced that by this stage Mr O’Mara had some concern regarding pension liberation schemes. The mechanics of a loan being made in respect of the member was a shared feature with the BPT. Mr O’Mara suggested in his evidence that he had put this concern to Mr Lau. The Tribunal agrees with HMRC that the text of the email in reply from Mr Lau was not reasonably reassuring. This should have been another ‘red flag’ for the appellants.189. As at the time of late June / early July 2011 only half of the appellants’ pensions had in fact been transferred into the scheme. The appellants could have attempted to stop the remaining half of the transactions proceeding. As at the end of June 2011 the appellants did not know if any of their funds had been transferred into the Salmon Enterprises pension scheme. There was no reason that the appellants could not have sought to abort the transaction if they were reasonably concerned. The warning signs addressed above might reasonably have alerted the appellants not to progress their involvement in the scheme which resulted in unauthorised payments.190. The appellants’ dealings with Mr Lau involved them initially seeking introducer commissions for bringing Mr Lau and the BPT to the attention of their clients. The email of September 2009 which introduced the scheme to clients was clearly aimed at promoting the scheme and it was intended that the appellants profit from this. In these circumstances it provided all the more reason why the appellants should have understood in broad terms what was proposed under the schemes in terms of extracting funds from their pensions.191. In those circumstances it is difficult to accept the suggestion that the appellants had been led into the scheme by Mr Lau and therefore the surcharges are not just and reasonable in all the circumstances. Mr O’Mara himself sought to lead others into the scheme for his own commercial benefit.192. Indeed, the email of Mr O’Mara from 22 June 2011 to Mr Lau does not appear to be the email of someone unduly concerned about the propriety of the scheme, even after a nine-month delay, absence in payments and absence of documentation in support. The email does not read as if Mr O’Mara was greatly concerned about the propriety of the scheme but rather reads as if his relationship with Mr Lau was between two people enjoying a mutually beneficial business relationship.193. The scheme depended on the existence of a loan agreement from Salmon Enterprises to the appellants’ company, Biz Works. They were never provided with any signed documents in support and this resulted in Mr O’Mara created his own ‘loan agreements’ between December 2011 and March 2012 which were not acknowledged by Mr Lau or Mr Ray. These were only drafted after the payments had already been received. These documents appear to have given Mr O’Mara reassurance that he was receiving a normal commercial loan but such reassurance cannot be said to be reasonable. They were ‘after the event’.194. Furthermore, Mr O’Mara never had any reason to believe that the loans he and his wife had entered into were with GG Blue Sky or Goswell Square Capital, the companies who actually made the payments rather than Salmon Enterprises. Mr O’Mara’s ‘loan agreements’ were nonetheless created in the name of Salmon Enterprises. Mr O’Mara received no contact from any individuals making the loan at Salmon Enterprises or the other two companies when the payments were made in the three tranches between December 2011 and March 2012. The absence of a loan agreement and any contact from an individual connected to making the loan or the payments between these dates should have put the appellants on notice that there was something untoward in the nature of the scheme even at this late stage. Nonetheless, once the appellants had received their payments the motivation to question the scheme had declined.195. The Tribunal is satisfied that the appellants knew that the purpose of the scheme entered into was to benefit from the value of their pensions prior to retirement age in the form of loans to their company. The intention behind the scheme and the intention behind the unauthorised payments, even if not held by the appellants, was that pensions were to be liberated and tax payments were to be avoided.196. The Tribunal is prepared to accept that the appellants honestly but mistakenly believed they were not avoiding tax charges properly due and were entering into a scheme to receive authorised payments. However, as is clear from the evidence, the appellants’ focus from the beginning of 2011, well before the transfer was effected, was the receipt of their funds and obtaining the loans for their company. The appellants wanted to know that the transactions would be effected, where their pensions had been transferred and when their loans would be received. The propriety of the scheme was not their focus nor their principal motivator.197. In the Tribunal’s view the appellants did not act reasonably in relation to entering into the scheme nor receiving the unauthorised payments.198. The Tribunal is of the view that the statutory surcharge scheme is not disproportionate, unjust or unreasonable in principle nor as applied on the facts of the appellants’ case. The appellants’ conduct forms one part of the factual circumstances.199. In all the circumstances of the case the Tribunal is satisfied that it is just and reasonable for the appellants to be liable to the surcharges as imposed. The Tribunal is satisfied it would not be just and reasonable for the surcharges to be discharged.200. The appeals should be dismissed.201. 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. RUPERT JONES TRIBUNAL JUDGE RELEASE DATE: 19 JANUARY 2017