In its long-awaited decision in the case of HMRC v Sippchoice Limited, the Upper Tax Tribunal has allowed HMRC’s appeal against a first instance ruling in favour of Sippchoice and has found that the meaning of the word ‘pay’ in s.188(1) Finance Act 2004 is limited to payments in money. It does not extend to any other form of payment, in particular not to the in-specie contribution of shares or other non-monetary assets to pension funds. This is of wide-ranging importance to the pensions administration industry and to thousands of investors who chose to make in specie contributions to their pensions, as it means that Relief at Source (RAS) repayments in respect of these contributions will not be agreed and, if already received, they may need to be repaid to HMRC. It is, however, possible that this decision will be appealed to the Court of Appeal.
The Tribunal reasoned that, even though in common usage the word ‘pay’ can indeed include other methods of settling debts beyond monetary payments, including through the contribution of assets of equivalent value, where tax legislation is concerned it is necessary to apply a purposive interpretation to establish the meaning of words in that legislation. On that basis, the Tribunal found, analysing the related provisions in the Finance Act 2004 as a whole, that it was clear that legislators had meant tax relief to apply only where money was paid into the pension scheme and not also assets of equivalent worth.
The Tribunal acknowledged that published HMRC Guidance was consistent with Sippchoice’s case: the natural reading of that Guidance is that HMRC did not see any objection to a promise to make a monetary contribution to a pension scheme being satisfied by a transfer of assets where the member and scheme administrator both agreed to this. The Guidance also explicitly referred to the possibility of structuring transactions so that a monetary contribution could be achieved without the need for cash to pass between a contributing employer and a pension scheme. The Tribunal found, however, that the Guidance did not have the force of law (and Sippchoice had in any case not brought evidence to show it had relied on the Guidance). The Guidance manuals are merely HMRC’s interpretation of the law for its internal guidance. Where legislation is inconsistent with HMRC’s publications, the legislation must prevail. This means that in future pension fund operators and others who have relied on HMRC Guidance in designing their processes will have to interpret the legislation itself in addition, to reduce the risk of reliance on a source that may successfully be challenged.
The Tribunal also found that, even if it is wrong on the interpretation of ‘pay’, the process followed by Sippchoice in accepting in specie contributions into members’ pension schemes was defective, without the required separation between a binding commitment to a cash contribution and a subsequent request by the member to be permitted to settle the debt through the contribution of assets such as shares to the pension scheme instead of via a cash payment. This finding may also, if not successfully challenged on appeal, have widespread implications for the industry, because other pension scheme operators used a similar process for accepting in specie contributions. Investors who lost their PRAS entitlement as a result of process errors could have a claim against the pension fund administrator. This issue may be academic, however, given the Tribunal’s definition of ‘pay’, because if only monetary contributions were legally possible in order to obtain tax relief, no in specie process would have fulfilled the necessary criteria, however it was designed.
The 90 day permitted period set out in s.195(4) Finance Act 2004 for the transfer of eligible shares to be treated as payment of contribution remains unaffected by this decision. The inclusion of this provision in the Act was indeed one reason that the Tribunal decided that the intention could not have been that other shares not defined as eligible could be transferred at any time in accordance with the s.188 provision under debate.
Further reading: HMRC v Sippchoice Limited  UKUT 149 (TCC).