Tribunal takes pity on confused taxpayer
The tax rules for pension contributions are very confusing for taxpayers. And for one tax payer, Gary Hymanson (TC06815), the confusion could have cost him £50,000 in tax.
Hymanson trades through his company Lightcredit Ltd. He has four pension schemes:
Lightcredit Pension Scheme, a small self-administered scheme which owns the company’s premises, and charges rent to the company.
Standard Life personal pension
Reassure personal pension
Reassure policy to collect NIC contracting-out rebates.
Regular monthly contributions were made by standing order into the Reassure and Standard Life schemes.
In 2011/12, Hymanson’s actuary advised him to apply to HMRC for fixed protection 2012 (FP12).
This would safeguard his personal lifetime pension allowance of £1.8m. In the absence of such protection, his maximum lifetime allowance would be cut to £1.5m on 6 April 2012, and would now be £1.055m. Taking any benefit in excess of the lifetime allowance is taxed at 55%.
Benefits up to the allowance are taxed more favourably: 25% is tax-free, and the remainder is charged at the individual’s marginal tax rate for the year in which benefit is taken. In Hymanson’s case, the judge estimated the difference in tax liability could be up to £50,000.
One of the conditions of FP12 is that no additional contributions may be made to any of the individual’s pension arrangements after 6 April 2012. However, the standing orders into the Standard Life and Reassure policies continued until April 2015, by which time an additional £6,937 of contributions had been made.
Hymanson’s actuary contacted HMRC seeking approval for these contributions to be refunded. HMRC was not sympathetic and cancelled the FP12 certificate.
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Hymanson was confused. His actuary had told him the rent paid by the company into the Lightcredit Scheme could continue, but that no fresh one-off contributions could be made. He took this (wrongly) to mean that existing agreed payments made as standing orders were allowed, and that it was merely new arrangements which were forbidden.
Judge Philip Gillett found that Hymanson had genuinely not understood that he needed to cancel those standing orders.
The judge asked himself whether Hymanson would “be granted the remedy of rescission of the payments made after April 2012 were he to take his case to the High Court?”
The courts can set aside a voluntary disposition on the grounds of mistake, if all of the following tests are satisfied:
Causation – the mistaken belief must have been causative of the disposition (in other words, without the belief, the disposition would not have been made). This was clearly the case for Hymanson.
Not simple ignorance. Based on the evidence, the judge considered that Hymanson had a genuine conscious belief that it “would be acceptable to continue making the standing order payments to the pension schemes”.
Seriousness – Hymanson had made contributions totalling £6,937, and stood to lose tax of around £50,000. In fact, even one contribution (£62.50) would have had that effect. The judge considered that Hymanson’s mistake was certainly serious.
Unconscionability – if any sane individual had understood the consequences of a given course of action, would he have done it? The judge considered the effect on Hymanson’s tax position was so disproportionate that it clearly could not have been what he intended.
Judge Gillett found that “if Mr Hymanson were to take his case to the High Court then they would issue an order for rescission of these additional contributions because of his mistaken belief as to the tax consequences of the payments”.
The equitable maxim
Having found that Hymanson would have access to a remedy in the High Court, the judge asked himself whether he should then “force him to go through that process, at the cost of significant expense and time, or should I attempt to short-cut the process?”
The equitable maxim can be summarised as:
“That which should be done should be treated as having been done”, or
“That which should not have been done should be treated as not having been done.”
The Upper Tribunal, in Lobler v HMRC  UKUT 152 confirmed that the FTT does not itself have the jurisdiction to grant remedies which lie in the power of the High Court. However, it does have the power to determine that “if rectification would be granted by a court who does have jurisdiction to grant it, [someone’s] tax position would follow as if such rectification had been granted”.
HMRC complained that the FTT should not apply the equitable maxim in this way as it would give rise “to very significant difficulties in relation to the administration by HMRC of the fixed protection rules”.
Standard Life confirmed it would be prepared to return the contributions to Mr Hymanson as long as HMRC would give assurance that such a repayment would not be treated as an unauthorised payment.
The judge conceded that he could only interfere with HMRC’s decision to revoke the FP12 certificate if he could find that the decision failed to take into account relevant factors, which he did.
HMRC had not taken account of any possibility that the payments to the pension schemes might be void as a result of mistake. HMRC had been prepared to rescind the payments if they had been made due to a bank’s mistake, but it did not consider the possibility that the payments could be rescinded because of Mr Hymanson’s mistake.
HMRC’s decision was unreasonable, and the judge directed HMRC to issue a new FP12 certificate to Hymanson.
HMRC has indicated it will not appeal this judgment. As this is an FTT judgment it is not binding on any future tribunals. It may, however, stand as a persuasive argument in similar cases.