Her Majesty's Revenue and Customs (HMRC) has confirmed it is not appealing against the tribunal's ruling in the case of Hymanson v Revenue and Customs Commissioners [2018] UKFTT 667 (TC) that a mistake could be treated as if it had not been made. An individual whom HMRC considered had lost his "fixed protection" (by continuing to make payments into his pension by direct debt) remains able to undo the mistake, relying on the tribunal's ruling.
The tax regime for registered pension schemes is complicated
This means it is easy to incur a disproportionate tax charge from a simple mistake, which, once made, cannot be reversed.
In the Hymanson case, a mistake was capable of being "rescinded"
Mr Hymanson appealed to the First-Tier Tribunal, which allowed him to rescind his mistake, meaning he was treated as if the mistake had not been made.
The case is specific to its facts but may help others
While the case is specific to its facts, the willingness of the Tribunal to help may be of relevance to other individuals who have suffered disproportionate tax consequences as a result of seemingly minor errors in complying with HMRC's conditions.
The Problem
The tax regime for registered pension schemes is complicated and keeps changing. When it is changed, the legislators attempt to provide protections so that individuals are not taxed retrospectively.
However, those protections are riddled with traps for the unwary.
The present case concerns the "lifetime allowance". The current regime limits tax privileges to pension savings that are within a lifetime allowance, and there are penal tax charges for exceeding the lifetime allowance.
The lifetime allowance has been reduced on several occasions. Individuals whose savings were already above the level to which it was being reduced could opt for "fixed protection". In very broad terms, this enabled them to carry on as if the lifetime allowance remained at its previous level, on condition that (amongst other conditions) they did not accrue any further benefits in registered pension schemes.
That makes logical sense, but the way in which it operates causes numerous problems for individuals and, by extension, the trustees and employers in relation to their pension schemes.
It was left to the individual to apply for fixed protection, if he wanted it, and the onus is on him to comply with the conditions. The sanction for failing to do so is that the fixed protection is cancelled and all his pension savings become subject to the new (reduced) lifetime allowance.
To make it even more complicated, fixed protection was not the only form of protection available for an affected individual to consider (there was also the option of "individual protection", which we will not go into here).
It is hardly surprising, with such a complicated regime which leaves important matters in the hands of the individual, that mistakes will be made. This is what happened in the Hymanson case.
The facts
Mr Hymanson, guided by his financial adviser, took fixed protection. One of his pension arrangements was also the owner of his business premises. Accordingly, once he had been granted fixed protection, he could continue to pay rent to that pension arrangement, but he should not have made any further pension contributions (to that or any other registered pension arrangement).
Mr Hymanson misunderstood that distinction and thought he could continue to pay contributions to his various existing pension arrangements under his existing direct debits, provided that he did not go beyond the existing contribution arrangements. In fact, he should have ceased all contributions, other than the payment of rent, which did not count as a pension contribution.
Accordingly, HMRC revoked Mr Hymanson's fixed protection.
The decision
The First-Tier Tribunal held that Mr Hymanson had made the pension contributions under a mistake. His mistake was not that he did not know the contributions were being made (he clearly did), but was in relation to the consequences of their being made. He made payments totalling approximately £7,000 and suffered lost tax of £50,000 as a result.
Had he known those tax consequences, the judge said that he would clearly not have made the payments. Accordingly, the payments could be returned to him by his pension provider and treated for tax purposes as if they had not been made. He would therefore retain his fixed protection.
Comment
An important factor in this decision was the fact that Mr Hymanson was paying rent to one of his pension schemes, and this was a large part of what caused his (understandable) confusion. He knew, because his adviser told him, that he was not supposed to continue making contributions, but the fact that he could continue to pay rent led him to misunderstand this requirement as meaning that he could not exceed his current contribution arrangements.
A claimant who did not have that factor would need to find another reason why they were mistaken as to the consequences of their actions, if they wish to rely on this case.
However, this case, which follows the earlier Upper Tribunal case of Lobler v Revenue and Customs Commissioners [2015] UKUT 152 (TCC), is further evidence of the tribunals' willingness to assist individuals who have unwittingly tripped over the minutiae of HMRC's complicated tax regime.
The disproportionality of the tax consequences was a key factor in both cases. As we will note below, such disproportionate consequences are not uncommon, which gives rise to the possibility of further appeals, and this will clarify the extent of the tribunals' willingness to assist.
(Lobler was not a pensions case, but one where an individual was allowed to "rectify" an error in a transaction to avoid an even more disproportionate loss of tax.)
Wider implications
The tax protections in the legislation governing registered pension schemes are subject to numerous complicated conditions and the consequences of seemingly minor errors by individuals can be devastating.
The Hymanson case related to fixed protection, but this is not the only form of protection, which - despite existing to protect the individual from retrospective taxation - does so in a manner that is prone to individuals making errors and incurring disproportionate tax losses. Others include:
- primary and enhanced protection - designed to protect the interests of individuals who had savings above the lifetime allowance before the lifetime allowance was introduced
- protected tax-free cash - designed to ensure that individuals who had rights to tax-free cash above the current limit (which in broad terms is 25% of the value of the savings) before that limit was introduced do not lose such rights
- protected pension ages - designed to allow individuals who had an unconditional right to retire before the current minimum pension age of 55 was introduced to keep that right
It would be regrettable if these errors cannot be reversed without the intervention of the tribunals in cases like Hymanson. We have seen in practice clear instances of minor errors leading to disproportionate and seemingly irreversible tax consequences.
This not only affects the individuals (though they are the worst affected) but also the trustees and employers in relation to their pension schemes, who may want to help but be limited as to what they can do. They may also suffer tax consequences themselves in the form of scheme sanction charges.
This case therefore potentially gives them further scope to resist such charges and to assist their employees or members.
Adding further to the challenge is the fact that HMRC is limited in its resources meaning that individuals may be forced, like Mr Hymanson, to appeal to the tribunals to have any hope of changing the situation. Many would welcome it if the Treasury and HMRC were to adapt their approach in the light of this decision, to save the need for further tribunal appeals.
Our pensions and tax experts work together to deal with such matters on behalf of trustees and employers and are used to dealing with HMRC on behalf of affected clients. Please contact us if you would like to discuss any of the issues in this alert.