John Mander Pension Trustees Ltd v Revenue and Customs [2015] UKSC 56

The Supreme Court held, by a 3-2 majority, that where HMRC withdrew approval of a pension scheme retrospectively under section 591B(1) of the Income and Corporation Taxes Act 1988, the 40% tax charge under section 591C fell to be assessed in the tax year with effect from which approval ceased, not the year the notice was issued.

Facts

The John Mander Ltd Directors Pension Scheme was approved by the Inland Revenue on 24 September 1987, with Mr and Mrs Mander as beneficiaries. On 5 November 1996, the funds of the scheme were transferred to the Vesuvius Shipping Ltd Pension Scheme, whose rules were subsequently changed to permit advances to beneficiaries not allowed for an approved scheme.

On 19 April 2000, the Revenue notified the administrator that approval of the JM Scheme was withdrawn under section 591B(1) of the Income and Corporation Taxes Act 1988 with effect from 5 November 1996. On 27 July 2000, the administrator was assessed under section 591C for the tax year 2000-2001 in the sum of £475,200. A fresh assessment was raised against a new administrator on 22 January 2007 in the same terms.

The taxpayer appealed, contending that the tax should have been assessed for the year 1996-1997, the year with effect from which approval was withdrawn. The First-tier Tribunal, Upper Tribunal and Court of Appeal all held the relevant tax year was 2000-2001.

Issues

The central issue was whether, where approval of a pension scheme is withdrawn under section 591B(1) by a notice that specifies an earlier effective date, the tax charge imposed by section 591C falls to be assessed in:

• the tax year with effect from which approval ceased (the date specified in the notice); or
• the tax year in which the notice of withdrawal was issued.

Arguments

Appellant (Trustees)

The trustees argued that section 591C tax was chargeable for the tax year 1996-1997, being the year with effect from which approval ceased per the notice. They contended this followed from the natural reading of sections 591C and 591D(7), and was consistent with the treatment of cessation under sections 591A(2) and 591B(2), where cessation operates automatically from the date the scheme ceased to qualify.

Respondent (HMRC)

HMRC submitted that until the notice was issued, the scheme remained technically approved. The tax charge therefore arose in the tax year in which the notice was given (2000-2001). They relied on section 591D(7)(b) as treating approval as withdrawn at the date of the notice, and argued that the alternative interpretation would expose taxpayers to retroactive tax with associated interest liability, and could prevent HMRC from making assessments within ordinary time limits.

Judgment

The Supreme Court allowed the appeal by a majority of 3-2 (Lord Sumption, Lord Neuberger and Lord Reed; Lord Hodge and Lord Carnwath dissenting).

The majority reasoning

Lord Sumption held that section 591C(2) imposed the charge as income tax under Case VI of Schedule D, so the administrator was treated as having received a notional profit or gain immediately before the cessation of approval. Under section 69(1) of the 1988 Act, the relevant year of assessment was that in which the profit or gain arose. The phrase ‘cessation of approval’ in section 591C must mean the date with effect from which approval no longer had effect — which, in section 591B(1) cases, is the date specified in the notice.

Lord Sumption reasoned that any other view would produce an irrational difference between the three modes of cessation (under sections 591A, 591B(1) and 591B(2)), given their common purpose. He further noted that the conditions in section 591C(4)-(6A), referring to the position ‘immediately before the date of the cessation of the approval’, made sense only if that date was the effective date of withdrawal, not the date of the notice.

Section 61(3) of the Finance Act 1995 (a transitional provision) presupposed that the date approval ‘ceases to have effect’ was not the same as the date when notice was given. Section 591D(7) was construed as identifying the three statutory bases for cessation, and stipulating the date at which assets were to be valued, but did not equate the date of withdrawal with the date of the notice.

Retroactivity

Lord Sumption addressed the alleged anomaly of retrospective assessment, noting that assessment to tax in arrears is common and that recharacterisation of a taxpayer’s affairs may legitimately follow events occurring later. He drew the contrast between Spence v Inland Revenue Comrs (1941) 24 TC 311 (recognition of pre-existing facts) and Morley-Clarke v Jones [1986] Ch 311 (retrospective alteration of legal effects). The withdrawal of approval under section 591B(1) recognised facts already existing, so interest accruing reflected unmerited tax advantages enjoyed in the interim.

Enforcement difficulties

The majority rejected HMRC’s argument concerning the six-year time limit under section 34 of the Taxes Management Act 1970, observing that the Revenue could (and later did) make regulations requiring information to be reported, and that section 36 of the 1970 Act provided a 20-year limit in cases of fraud or negligence. The alternative — leaving the chargeable period to HMRC’s discretion — was deemed worse than the problem.

Lord Neuberger and Lord Reed

Lord Neuberger emphasised that ‘an approval ceasing to have effect’ and ‘the date of cessation of approval’ should bear the same meaning, both pointing to the earlier date. Lord Reed analysed the legislative scheme as designed to recover unmerited tax savings accumulated within the fund, with the valuation and assessment naturally tied to the date the scheme ceased to qualify.

Dissent

Lord Hodge (with Lord Carnwath) would have dismissed the appeal, relying heavily on the presumption against retrospective taxation, citing Greenberg v Inland Revenue Comrs [1972] AC 109 and W T Ramsay Ltd v Inland Revenue Comrs [1982] AC 300. They considered that section 591C(1), expressed in forward-looking terms (‘tax shall be charged … where an approval … ceases to have effect’), pointed to the tax year in which the notice was served, and that there were no clear words imposing a retroactive charge with associated interest liability.

Implications

The decision clarifies that where the Revenue withdraws approval of a pension scheme retrospectively under section 591B(1) of the Income and Corporation Taxes Act 1988, the section 591C tax charge is assessable in the tax year with effect from which approval ceased, not the year of the notice. This brings the section 591B(1) regime into line with the automatic cessation provisions in sections 591A and 591B(2).

The practical consequence, acknowledged in the judgment, is that HMRC may now be out of time to raise fresh assessments in cases where the standard six-year limit under section 34 of the Taxes Management Act 1970 has expired. The decision was identified as the lead case in a number of appeals pending before the First-tier Tribunal, so its effect extends to other schemes which engaged in similar practices before the 2006 reforms under the Finance Act 2004.

The judgment also illustrates the interplay between statutory construction and the presumption against retroactive taxation. While the dissent saw the presumption as decisive, the majority considered that the language and scheme of the provisions provided sufficient clarity to displace any concern, especially given that retroactivity was inherent in section 591B(1) itself.

The case has limited future application in respect of pension scheme approval (given the change of regime in 2006), but its reasoning on the date of charge for retroactively triggered tax liabilities, and its treatment of the relationship between statutory provisions imposing tax in differing circumstances, remains of broader interpretative interest.

Verdict: Appeal allowed. The Supreme Court (by a 3-2 majority) declared that the Inland Revenue were not entitled to assess the administrator of the John Mander Pension Scheme to tax under section 591C of the Income and Corporation Taxes Act 1988 for the year 2000-2001; the relevant tax year was 1996-1997, being the year with effect from which approval was withdrawn.

Source: John Mander Pension Trustees Ltd v Revenue and Customs [2015] UKSC 56