Case Comment: John Mander Pension Trustees Ltd v Commissioners for Her Majesty’s Revenue and Customs  UKSC 56
11 Friday Sep 2015
The Supreme Court has held by a 3:2 majority that a tax charge arising under the Income & Corporation Act 1988, s 591C falls to be assessed in the tax year with effect from which approval ceased rather than the tax year in which a notice withdrawing approval is issued.
The present case was a lead case for a number of appeals awaiting decision. In September 1987, the appellant received approval from HMRC. Approval provided a pension scheme with access to tax advantages, but also imposed a restriction namely that the benefits had to be paid as income, for example by way of annuity.
The Finance Act 1991 amended the 1988 Act by introducing three methods that allowed cessation of approval of a scheme:
(i) approval ceased automatically 36 months after the introduction of regulations if the scheme still failed to comply with them (s 591A);
(ii) where the Revenue considers that the facts cease to warrant the continuance of approval, the Revenue may also withdraw approval by notice from a date specified in the notice, which must not be earlier than the date when the facts first ceased to warrant the continuance of approval (s 591B(1)); or
(iii) immediately after an unapproved and unauthorised alteration is made to the scheme (s 591B(2)).
A small practice amongst pension schemes grew involving the inducement of circumstances designed to bring about the loss of approval in order to be free of the restrictions imposed on benefits whilst retaining the tax advantages granted by approval. To counter this practice, the Finance Act 1995 inserted s 591C into the 1988 Act, which imposed a tax charge of 40% on the value of the assets of the scheme immediately before “cessation of approval”. Additionally, s 591D was inserted into the 1988 Act, whose subsection (7) sought to add clarity to the dates on which approval ceased to have effect under s 591C.
On 5 November 1996, the funds of the appellant were transferred to a new scheme, the effect being, advances were to be made to beneficiaries which were not permitted for an approved scheme. In April 2000, HMRC notified the administrator of the appellant that approval under s 591B(1) of the 1988 Act had been withdrawn with effect from 5 November 1996. In July 2000 an assessment to tax under s 591C was raised against the then administrator. In January 2007, a fresh assessment was made under s 591C to the new administrator, the appellant.
The appellant appealed against both assessments on the grounds that the correct tax year for the assessment was in fact 1996/1997 and consequently, HMRC was out of time to make an assessment due to the six-year time limit imposed by the Taxes Management Act 1970, s 36. The appellant’s argument was rejected by the First Tier Tribunal, whose decision was upheld in the Upper Tier Tribunal and Court of Appeal. Further analysis of the appellate history can be found in this blog’s Case Preview.
Supreme Court Judgment
Lord Sumption provided the lead judgment of the majority decision. After considering HMRC’s argument – in substance, that until the moment when a notice of withdrawal is issued under s 591B(2) the scheme remains technically an approved scheme and therefore the correct tax year for assessment is the tax year within which the notice withdrawing approval was issued – Lord Sumption was of the opinion that the tax charge arising under s 591C falls to be assessed for the chargeable period in which the withdrawal of approval took effect (i.e. the date stated within the notice, rather than the date on which the notice was sent). Consequently, HMRC was indeed time-barred from bringing a fresh assessment against the appellant. The key provision in reaching decision was s 591C, which must be read in conjunction with s 591D(7), impacting in turn upon s 591C’s ambit and effect. The exact effect of the words “cessation of approval” in s 591C(2) were easy to comprehend in relation to the methods of approval withdrawal under s 591A and s 591B(1) as withdrawal is automatic under those two provisions.
The contentious point in the case came from s 591C’s interaction with s 591B(1); Lord Sumption felt that the equivalent in the case of withdrawal by notice under s 591B(1) was the date specified in HMRC’s notice as not only was this the natural result of the language of the provisions but any other view would mean the tax charge under s 591C would fall to be assessed in a later tax year under s.591B(1) than would be the case under s 591A or s 591B(2). Furthermore, s 591D(7) confirms this when the provision equates “approval of the scheme being withdrawn” to “ceasing to have effect”. Both Lord Neuberger and Lord Reed agreed.
Ignoring that HMRC would be time-barred from bringing a fresh assessment, the result of the majority decision was the appellant’s exposure to retrospective assessment, which would have led to interest accruing from the date specified within the withdrawal notice: a starting point which HMRC argued would pre-date the assessment itself. Furthermore, if the correct date by which the tax year of the assessment would be determined was the date specified in the notice, HMRC would find itself time-barred in many cases due to the long interval which can elapse before the facts justifying withdrawal of approval comes to its attention. In response to this point, Lord Sumption pointed out that it is inherent in the process of assessment that a taxpayer may be assessed on profits or gains that arose in a chargeable period earlier than that of the assessment; in fact this would occur whenever tax is assessed in arrears. Furthermore, such retrospective assessment is not anomalous in the present case as here it is the recognition of facts which already existed. Lord Neuberger added to this, stating that retroactivity is inherent in any case where a notice is served under s 591B(1) and it is right that the charge to tax and valuation of the assets should occur on the same date.
Lord Hodge, with whom Lord Carnwath agreed, provided a dissenting judgment and specifically addressed the issue of retrospective assessment, citing the general principle stated in W T Ramsey Ltd v Inland Revenue Comrs  UKHL 1 that, despite the fact that legislation to counter tax avoidance as a matter of sound policy may involve provisions with retroactive effect, this does not negate the need for clear and positive words as to the retrospective effect of the legislation. Lord Hodge did not feel the clear and positive words needed to ensure retrospective effect were present in s 591D(7). Moreover, s 591D(7)(b) makes reference to “the approval of the scheme being withdrawn”, in other words, the date on which the withdrawal notice was given. There are clear policy reasons for this; the administrator of a pension scheme may be unaware of the circumstances causing the HMRC to withdraw approval, whereas in the case of the withdrawal methods under s 591A and 591B(2), the administrator would be aware of the circumstances justifying withdrawal of the approval, therefore it would be unfair to impose a liability for interest on unpaid tax in such circumstances.
The Supreme Court‘s majority decision has cleared the uncertainty caused by section 591B(1) and will serve as binding precedent on lower courts. Pension schemes with similar cases pending will be particularly pleased as the Revenue may now find itself time-barred from bringing further claims.
However, it will be interesting to see to what extent Lord Hodge’s dissenting judgment will serve as a persuasive authority in subsequent cases.