A loan made to a taxpayer by his pension scheme produced an unexpected unauthorised payment charge together with an unauthorised payment surcharge as the pension scheme member had received a benefit before his normal retirement age.
Where a pension scheme makes an Unauthorised payment to a pension scheme member, the member will be subject to:
- An unauthorised payment charge of 40% of the payment.
- A potential unauthorised payment surcharge of 15% of the payment.
Authorised payments are defined in law, all other payments are unauthorised. Payments made directly to a member before their normal retirement age, including loans, are generally unauthorised payments.
In David Foulkes v HMRC [2024] UKFTT 00322 (TC), the First Tier Tribunal (FTT) found that a loan made to the member of a pensions scheme was an unauthorised payment, it had been made in connection to an investment acquired using his pension fund's assets.
- The taxpayer transferred his pension fund to another pension scheme (Alderley).
- Alderley transferred these funds to an account in the name of Xtend. This was by way of investment into a company (Haimachek).
- The taxpayer was informed that “investors could receive a loan… unconnected to the pension fund”.
- A loan was made to the taxpayer, the payment was received four days after the investment was made in Haimacheck, from an account of Xtend.
- HMRC issued a Closure notice, arguing that the loan was an unauthorised member payment. The closure notice charges were based on the pension transfer of £18,309 and not on the amount of the loan £13,040.
- The taxpayer Appealed, arguing that there was no unauthorised payment.
The FFT found that:
- The loan made to the taxpayer was an unauthorised member payment, because:
- It was likely that the possibility of obtaining a loan was raised with the taxpayer when they first discussed investing the fund in Haimachek.
- The loan was made available after the taxpayer had instructed Alderley to invest the fund in Haimachek.
- The loan agreement was not expressly conditional on any investment in Haimachek, however, there was a causal link and without the investment in Haimachek no loan would have been made available.
- It is not relevant that the taxpayer was unaware of any connection between the investment of his fund in Haimachek and the loan he received.
- The various steps that were taken were all inter-connected parts of a single structure and there was a clear causal link.
- The fact the taxpayer was told that the loan would be unconnected to the pension fund does not make it so.
- It was just and reasonable for the taxpayer to be subject to the unauthorised payments surcharge because the taxpayer could have identified a link between the investment and the loan.
- The investment in Haimachek and the possibility of a loan were discussed at the same meeting.
- The funds were made available to the taxpayer after the pension transfer with instructions to invest the fund in Haimachek, but before he had signed the loan agreement.
- The loan agreement itself referred to the taxpayer as having an account balance with a company, which the taxpayer knew was connected with the investment in Haimachek
- The taxpayer chose to take part in the arrangements, and they gave rise to an unauthorised member payment.
- The unauthorised member payment amounted to a significant proportion of the fund.
HMRC accepted that the closure notice overcharged the taxpayer because the charges were based on the pension transfer and not on the amount of the loan.
The appeal was partly allowed, the taxpayer was subject to an unauthorised payments charge and unauthorised payments surcharged based on the amount of the loan £13,040.
Useful guides on this topic
Pensions: Unauthorised payment charges
What is a pension unauthorised payment? When does a tax charge arise? Who pays the charge?
How to appeal an HMRC decision
Disagree with an HMRC decision? How do you appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?
Closure notices
When does HMRC issue a Closure Notice? Can a taxpayer demand one? Are there appeal rights?
Pensions: Tax rules and planning
What tax rules apply to pensions? What tax relief is available? What tax charges can arise? What planning opportunities are there?
Pensions: Tax charge for excess contributions
When does a tax charge arise for excess pension contributions? What are taxpayers' responsibilities under Self Assessment?
Pension contributions: Personal or company?
Is it more tax-efficient to pay pension contributions personally or via your own company?
External link
David Foulkes v HMRC [2024] UKFTT 00322 (TC)
