Pension loan sharks preyed on taxpayers
Two taxpayers who took loans from the same provider were accused of connecting those loans to payments from their pension funds, and thus suffered tax charges. The two cases had very different outcomes when heard at FTT.
A desire for some pension administrators and other financial organisations to generate fees and commissions has led to some pension scheme members being lured – often unwittingly – into transactions which fall foul of the pension liberation rules.
Two first tier tribunal (FTT) cases which illustrate this point are:
- Gary West (TC07385) appealed against an assessment of £4,460, and his case was heard by Judge Jones in May 2019 and
- Elizabeth Hughes (TC07417) appealed against tax and surcharges of £5500, and her case was heard by Judge McNall in September 2019.
Both taxpayers wished to borrow money. They were each approached by a salesman for Blu Funding Corporation offering loans on fully commercial terms. West received a loan of £11,650 and Hughes a loan of £10,000.
They were also approached at roughly the same time by a company called Fast Pensions Ltd, offering to transfer their pension rights into its own scheme, the FP1 Retirement Plan.
Hughes accepted this offer, consolidating three separate pension pots into the FP1 scheme. West transferred around £48,000 from a Novartis pension which he believed was underperforming.
Both tribunals were satisfied that, at the relevant time, both West and Hughes:
- Were unaware that Blu and Fast Pensions were in any way connected
- Believed that the loan and the pension transfer represented two entirely separate pieces of sensible financial planning
- Had no intentions of extracting value from their pension policies.
What’s the problem?
The legislation (FA 2004 s161) includes among the category of pension payments “a payment made or benefit provided under or in connection with an investment… acquired using sums or assets held for the purposes of a registered pension scheme.”
The Upper Tribunal (in Danvers 2016 UKUT 0569) had concluded that the legislation was sufficiently broad to catch “payments made to a member of a pension scheme by a third party in circumstances where there is a connection between that payment and an investment in the scheme”.
No connection with loan
The West and Hughes cases showed none of the blatant signs of connection seen in Danvers (borrowing conditional on the transfer of pension funds into a specific scheme, lending limited to the amounts transferred, etc). The judges needed to examine whether there might be a lesser “causal link” between pension and loan – which would take the form of following the money trail.
Follow the money
The FP1 scheme most certainly made investments into Blu, and in some instances it was possible to demonstrate that funds lent to members by Blu were directly matched by payments made to Blu by the FB1 scheme.
It was clear that the monies lent to West had originated in the FP1 scheme. HMRC was able to point to the entry in the pension scheme’s bank account paying £11,650 labelled “transfer loan to Blu Funding”.
However, HMRC could not point to any credible paper trail showing a clear funding link between FP1 and the monies lent to Hughes by Blu.
HMRC offered two rather suppositious arguments to support a presumption that the source of Blu’s loan to Hughes was funds advanced by FP1, but Judge McNall was not convinced.
Judge Jones reluctantly concluded that West had in fact received an unauthorised payment as there was evidence that the money lent to him had come from his pension pot. The £4,460 tax charge was upheld.
His judgment included a postscript in which he asked HMRC to take a more lenient approach to taxpayers who, like West, were victims of the “exploitative and untoward behaviour by the promoters and orchestrators” of pension liberation schemes.
He hoped HMRC’s priority would be to investigate and assess the major beneficiaries, orchestrators and promoters of unlawful schemes rather than individuals (such as West) who had “low or no level of culpability, no knowledge of the link between pension transfer and loan received, no benefit but rather financial loss caused by the unauthorised payment, a relatively low level of tax at risk and insecure finances”.
Judge McNall concluded that HMRC had not produced sufficient evidence to convince him that Hughes had received an unauthorised payment, and her tax liability of £5,500 was discharged.
He spoke strongly in support of Judge Jones’ “postscript”, and was critical of HMRC for not having included the West case in its bundle of authorities, pointing out that there was good reason why that case should have been directly drawn to both his and Hughes’ attention.
Since at least 520 people had been encouraged to transfer their pensions to FP1 and other schemes run by Fast Pensions, the judge commented that “there is at least potentially a risk of the appearance of unfairness” if HMRC fails to share decisions which are “strongly similar, involving the same law, and some of the same parties”.
Two virtually identical cases, two different outcomes. Neither taxpayer actually wanted to strip capital from their pensions. Their circumstances put them at the mercy of pension scheme “sharks”.
Hughes was lucky, in that HMRC could not prove a direct financial link between the pension and the loan; West was not so lucky.
Both judges felt that HMRC’s time and effort might better be served hunting the sharks rather than their prey.