Thorpe v HMRC

Mr Thorpe, the appellant, was the sole director, and he and his wife were the only shareholders, of a company, Juriscommerce Securities Limited (“the company”). He and his wife were the only employees of the company. The company set up a pension scheme for its employees in March 1979 by a declaration of trust. The administrator of the scheme at that stage was Manufacturers Life Insurance Company Limited, invariably referred to as ManuLife. Eventually the scheme was accepted by the Revenue as an exempt approved scheme with effect relating back to 1979. In the meantime, sadly, Mrs Thorpe died in 1991. The benefits arising under the scheme on her death were paid out.

After her death Mr Thorpe was the only employee of the company and the only member of the scheme. In March 1998 he formulated a plan to wind down the company's business with a view to eventual closure on the part of the company and retirement on his part. He intended to retire in March 1999, by which time the business of the company would have been brought to a close.

In that situation it was open to Mr Thorpe to take the benefit of the entire pension fund on his retirement by taking pension benefits under the scheme, with a maximum allowable tax free cash-lump sum on retirement and a pension by way of annuity provision as regards the balance. However, Mr Thorpe did not wish to follow that course. Instead he wished to take the whole fund as a cash sum. That is in effect what he did in 1998 to 2000, receiving some £260,000 which represented originally the proceeds of an insurance policy which had been the sole asset of the scheme, amplified since it was cashed in by further contributions and interest and so on.

He did retire on 31 March 1999. The Revenue did not accept that it was open to him to take the whole benefit of the scheme funds in this way. Originally it assessed him to tax on the sum paid out to him as a payment not authorised by the rules of the scheme. It also later withdrew approval of the scheme, having at one stage previously asserted that approval had ceased automatically. In the meantime in 2000 the company was dissolved.

Mr Thorpe appealed all these various assessments to the Special Commissioners. The appeal was heard by Mr Julian Ghosh QC in January 2008 and was dismissed by a decision released on 19 May 2008. Mr Thorpe appealed to the Chancery Division. The appeal was heard by Sir Edward Evans-Lombe, and in the judgment which he delivered on 26 March 2009 he dismissed Mr Thorpe's main appeal, although he did allow an appeal against certain assessments on a point that was first raised in the course of the hearing.

With permission granted by Patten LJ, Mr Thorpe appeals against the dismissal of his appeal by Sir Edward. HMRC, which by then the Revenue had become, put in a respondent's notice, but chose not to pursue its cross-appeal against the judge's decision so far as it allowed some parts of Mr Thorpe's appeal.

The issues before us are two. First, was the judge wrong to dismiss Mr Thorpe's appeal having regard to the fact that, as he contends, Mr Thorpe was at the material time the only beneficiary of the trust and therefore entitled to take the whole fund for his sole benefit under the principle of Saunders v Vautier (1841) Cr. & Ph 240. Second, should the relevant assessment have been set aside, in any event, on appeal because the Inland Revenue's withdrawal of approval of the scheme was invalid as a matter of public law, being unreasonable and ultra vires, devoid of any reasonable ground or basis.

Before dealing with those two points I will set out a little more of the facts. Before the Special Commissioner there was a statement of agreed facts, although Mr Thorpe gave oral evidence in addition. I have already mentioned some of the facts. By the material date in 1998 the scheme was governed by a supplemental trust deed dated 1 January 1994 made between the company of the first part, Mr Thorpe of the second part and Hartley Pensions Management Services Limited (Hartley) and Miss Alison Thorpe, daughter of Mr Thorpe, of the third part. The original trustees had been ManuLife and Mr Thorpe. In 1994 they became Mr Thorpe, Hartley and Miss Thorpe. The scheme became at that stage a small self-administered scheme.

The company had formulated rules for the scheme but it retained the right to vary those rules subject to provisos of a normal kind. Under the rules, benefits would take the form of a lump sum on death in service, a pension payable to the member on retirement, and a pension payable to a widow and/or any dependants on the member's death whether in service or after retirement. A dependant means a child up to the age of 18 and any other individual who, in the trustees' opinion, is financially dependent on the member at the date of death or retirement as the case may be. It does not, for example, as some pension schemes do, exclude someone who comes into such a relationship with the member after retirement.

Benefits are of course limited by reference to what are said to be statutory limits but in practice that means limits consistent with continued Inland Revenue approval.

Rule 5 dealt with the payment of pension benefit and as usual precluded commutation or assignment except if permitted by the rules, which in effect means that commutation is allowed as regards the tax-free lump sum but not otherwise. Under Rule 6 the lump sum benefit on death in service was payable at the discretion of the trustees to all or any of the widow of the member and his dependants, children and grandchildren. Rule 8 imposed the then normal limits on pension benefits as one sixtieth of final remuneration per year of service up to a maximum of 40 years.

As I say, Mr Thorpe retired from the company service on 31 March 1999. He was then 68 years old with some 23 years of service. Before that time, after the 1994 amendments, the original ManuLife pensions policy, the original sole asset of the scheme, was assigned to the trustees and was cashed in with proceeds of some £132,000 originally paid into a building society deposit account. Thereafter until 1998 contributions continued to be paid by the company and also by Mr Thorpe.

Following a further review of the position, the company decided to cease making contributions to the fund, the last of them being made in August 1998. At that stage it executed a deed with the trustees, described as a deed of discharge, under which the trustees accepted that it would make no further contributions to the scheme. One feature of the deed was that the company, which had under the rules the power by deed to appoint or remove trustees, purported to assign that power to Mr Thorpe. Hartley informed Mr Thorpe as to the pension benefits which he could receive by way of a cash lump sum and an annuity which would exhaust the fund and would not leave anything for a widow or dependant's pension. It would have been a matter for Mr Thorpe's choice as to whether he took a pension annuity solely for his own benefit or whether he included provision for a widow or dependant. Since at that stage his wife was long since dead and he apparently had no intention of remarrying, and has not remarried, and, on the footing that there was at that stage at any rate no other dependant, it would have been an entirely natural and rational decision on his part if he had sought to take pension benefits in the normal way, to take the maximum available tax-free lump sum in cash and to take the balance by way of an annuity for his sole benefit.

However, as he explained in his witness statement, he found the prospect of taking any part of his pension benefits by way of annuity unattractive because it was financially disadvantageous, as compared with taking the whole pension fund as a lump sum if he could do so free of tax liability. He conceived the idea that, being the sole beneficiary, as he thought he was, he was entitled to direct the trustees to pay the whole fund over to him. This he did by notice dated 5 November 1998 on the express basis that he was absolutely entitled to the whole beneficial interest declared by the trust deed. Hartley declined to accept the validity of this demand. In response to that, on 16 November 1998 he sent a further document signed by him purporting to remove Hartley as a trustee. It does not appear to me that that could have been effective on any basis. Hartley pointed out in reply that at least a deed was required and they said a new pensioneer trustee would need to be appointed, this being in effect one of the conditions of continued Revenue approval of a small self-administered scheme because of the very risk that otherwise the funds would be applied otherwise than in accordance with the terms of the scheme.

At that time the balance in the building society account was some £255,000. In December Mr Thorpe was able to withdraw £200,000 of that from the building society account in which it stood. I know not how he did that but it may be that the signature of two trustees was sufficient and that he was able therefore to sign a proper mandate with the collaboration of his daughter. He withdrew a further £12,000 in December 1999 and the balance of some £60,000, as it stood by then, in July 2000. It was shortly after that in September 2000 that the company was dissolved.

The assessments to which the appeal relates were made under the Income and Corporation Taxes Act 1988 section 591C, for the years 1998/9 and 2004/5. These were issued on an alternative basis. The first was on the basis of automatic cessation of the approval of the pension scheme. The second followed the express withdrawal of that approval by notice dated 30 July 2004 in case the approval had not ceased automatically. The contention as to automatic cessation of approval was put forward in a letter dated 22 August 2002 on the basis that the informal winding up had been inconsistent with the scheme as approved and that the alteration consisting of the payment of the whole sum to Mr Thorpe had itself caused the approval to cease under section 591B of the 1998 Act. That section covers two alternative possibilities, both of which are relevant, so I will read the whole section:

The argument in 2002 was that the withdrawal of the funds amounted to an alteration of the scheme made without the approval of the Board so that the previous approval automatically ceased to have effect. The alternative argument is based on the proposition that in 2004 the Board expressly withdrew its approval, acting under subsection (1). The consequence of approval ceasing to have effect is that a tax charge arises under section 591C at 40% on the amount equal to the value of the assets held immediately before the date of cessation of the approval for the purposes of the scheme. The tax is chargeable on the administrator of the scheme. The section is subject to various conditions but it is clear that at least one of these is satisfied so that the section does apply.

I should mention that the relevant legislation has since then changed with effect from April 2006 but not so as to affect the present case.

Before the Special Commissioner, as in the High Court and before us, Mr Thorpe was represented by Mr John Macdonald QC and HMRC by Ms Simler QC, leading before us Mr Andreas Gledhill. The points argued before the Special Commissioner ranged more widely but they included the two points which are taken on the appeal. The Special Commissioner rejected the Saunders v Vautier argument on which Mr Thorpe based the proposition that by 2 December 1998, the date of the first payment, the funds were no longer held for the purposes of the scheme but were held on trust for him absolutely. As regards cessation of approval, HMRC relied, as I say, on section 591B(1) and the notice given in 2004, not on section 591B(2) and the events of November and December 1998. The Special Commissioner decided against Mr Thorpe on this point on the basis that the validity of the withdrawal of the approval of the scheme could not be challenged by way of appeal. Accordingly the appeal against the assessment under section 591C was dismissed.

The Special Commissioner referred to Mr Thorpe's oral evidence and said this at paragraphs 38 to 39 about its effect:

In the High Court the Saunders v Vautier point was argued, together with others which are not now pursued. The point as to the ability to challenge the withdrawal of approval under section 591B(1) on this statutory appeal was not renewed. The judge upheld the Special Commissioner in relation to the Saunders v Vautier point. He dismissed the appeal against the assessment under section 591C. For other reasons he allowed appeals against other assessments but I need not take time on those.

Before us Mr Macdonald put first his arguments on the public law point and second his arguments on Saunders v Vautier, but he accepted that he had to succeed on both. In my judgment he succeeds on neither. I propose to deal with Saunders v Vautier first. The principle on which Mr Macdonald seeks to rely is well set out in Snell’s Equity, 31^st edition, at paragraph 27-25:

Miss Simler in her skeleton accepts at this level, while reserving the position for eventual argument in the Supreme Court of the United Kingdom, that the principle applies if all possible beneficiaries under a discretionary trust are identified, of full age and capacity, and all agree in the demand to the trustees to bring the trust to an end.

In the present case Mr Thorpe's position depended on the proposition that there was no other possible beneficiary besides himself at the date of his demand or the date of the first payment, there being no relevant difference on the facts as between those two dates. He asserted that he was the sole beneficiary and he sought and obtained no agreement on the part of anyone else who might have been a possible beneficiary.

The Saunders v Vautier principle, which is most familiar in the context of family trusts, can in theory apply to a pension trust. But it is clear to me, as it was to the judge and to the Special Commissioner, and for the same reasons, that it did not apply in this case on the facts as they were in November and December 1998. At that time the fund was held to be applied in accordance with the rules so as to provide benefits as mentioned in the rules. On his retirement Mr Thorpe could take benefits including a limited lump sum and an annuity. He had not yet retired. If he had died in service the payment fell to be made at the trustees’ discretion under rule 6, which would have gone, it is likely, to all or some of his children and his grandchildren. If he remarried or came to have other dependants, his widow or dependant might be entitled to benefits themselves. As the Special Commissioner said at paragraph 46 of his decision, Mr Thorpe was not then entitled to the whole beneficial interest in the trust fund. It would have been a breach of trust to pay the fund over to him except in accordance with the terms of the deed and rules. Mr Macdonald argued that the contingent benefits were only contractual and did not take effect by way of trust. I disagree. The fact that they could be varied, within limits, under Clause 8 does not provide to me the slightest indication that they were contractual rather than taking effect as the beneficial trusts of the scheme which, within limits, were capable of being varied, as is true in many trusts. The contingent benefits, in particular those under Rule 6, arose directly under the rules which gave effect to the trusts of the scheme. They were a good deal more real than, to take an example from the books, the possibility of a 65 year old woman having a further child which in 1926 prevented the class being regarded as closed under Saunders v Vautier: see Re Deloitte [1926] Ch. 56.

Mr Macdonald argued before us that, in order to allow effect to be given to Mr Thorpe's demand for the funds to be paid over to him on 6 November 1998, he should be treated as having retired on that date. However, first that contention is impossible given Mr Thorpe's evidence before the Special Commissioner that he did not in fact retire until 31 March 1999. Secondly, even retirement would not give him the right to do other than take retirement benefits in accordance with the rules. He could opt, and no doubt would have opted, to take the maximum cash sum and the corresponding annuity for his own sole benefit. On the one hand, only by taking that choice would he exclude the possibility of benefits to others and, on the other, by taking that choice he would exclude the possibility, even if it had otherwise existed, of payment of the whole sum to himself. Moreover, he knew by then that he could not get anything other than the pension provision in accordance with the rules if and for so long as Hartley remained as a trustee. That is why he purported to remove Hartley as a trustee. Although it is unnecessary to decide the point, it seems to me that this was not an effective exercise for at least two reasons. One is that the company's original power to appoint and remove trustees in clause 5(a) of the trust deed required a deed for its exercise, and Mr Thorpe did not use a deed. The other is that on the one hand the company did not seek to exercise the power and on the other hand its attempt to confer that power on Mr Thorpe by way of assignment rather than, in default, on the trustees as a body in August 1998 seems to me to be misconceived. I know of no basis on which that could have been done by assignment, as was purportedly done by the deed of discharge in August 1998.

In my judgment the Revenue was correct to say that the entire pension fund was held to be applied for the purposes of the scheme immediately before the moment by reference to which the approval of the scheme was withdrawn.

Mr Macdonald's other point is that the withdrawal of approval by the letter of 30 July 2004 was invalid as a matter of public law and that this is a point which can be taken on appeal to the Special Commissioners. There is no express provision for such an appeal. In the 30 July 1994 letter it was said that there was no right of appeal, but that the withdrawal of approval could be challenged by judicial review if that was done promptly. In my judgment that was a correct statement of the position. Mr Macdonald relied on the principle stated generally in Wandsworth London Borough Council v Winder [1985] 1 AC 461 and applied in the context of claims for income tax in Pawlowski (Collector of Taxes) v Dunnington (1999) 11 Admin. LR 565. In Pawlowski the claim for recovery of tax against Mr Dunnington was on the basis that his employer had made payments of emoluments to him without making the statutorily required deductions of PAYE tax, and the claim against him was on the basis that the Board of Inland Revenue had concluded that he had received the payments knowing that the employer had wilfully failed to make these deductions. In the county court the judge considered that the issue was whether the Revenue had shown that the employee had indeed known of the employer's wilful failure to make the deductions and he dismissed the claim on that basis.

The Court of Appeal, on an appeal by the Collector of Taxes, held that this was the wrong test but that it was open to the defendant to challenge by way of defence the legality of the Board of Inland Revenue's conclusion on public law grounds. That is, as it seems to me, very different from saying that the point sought to be taken in this case can be raised on a statutory appeal where no provision to that effect exists among those which allow taxpayers to appeal to the Special Commissioners.

There are statutory provisions allowing appeals to the Special Commissioners, now the Tax Chamber of the First Tier Tribunal, in respect of decisions by the Board of Revenue as distinct from assessments to tax made by an Inspector of Taxes. Miss Simler cited to us sections 741 and 754 of the 1988 Act as well as paragraph 16(2) in Part III of schedule 27 to the 1988 Act. She accepted that there may be cases in which such jurisdiction arises by necessary implication. In the present case there is no express provision and, she contended, no basis for implication.

I will not decide either way, even if I could on this appeal, whether in principle the analogy of Pawlowski v Dunnington could be applied in defence to a claim for payment of tax under an assessment under section 591C. However I agree with the Special Commissioner and, so far as he said anything about it with the judge, that the point is not open to be taken on this statutory appeal.

Miss Simler, in a supplemental skeleton argument, drew to our attention the recent decision of Sales J in Oxfam v HMRC [2009] EWHC 3078 Ch in which he heard an appeal in a VAT case in which there had been both an appeal and a separate judicial review proceeding, both of which came before him. He decided both aspects of the case in favour of HMRC but obiter he made observations to the effect that the public law point, which was that raised in the judicial review proceedings, could have been raised by way of appeal, under the statutory provisions, to the VAT and Duties Tribunal.

That, therefore, was a decision on the construction of the statutory provision providing for appeals to the Tribunal. It does not affect the present case where there is no basis for a decision that the taxpayer could appeal against an assessment under section 591C on the basis that the Revenue's withdrawal of approval under section 591B(1) was invalid as a matter of public law. By contrast, although the point was not discussed before us, it seems to me that, if the assessment relied on had followed an automatic cessation of approval under section 591B(2), so that no decision of the Board was involved, it may well be that the Special Commissioner or now the First-Tier Tribunal would be entitled to consider whether approval had in fact come to an end automatically under that subsection. That is not this case.

I will deal briefly with Mr Macdonald's case on the merits of the public law aspect, which it has to be said is at least seriously undermined by his failure to make good his Saunders v Vautier point. Further, as it seems to me, such force as it might otherwise have (if any) is also substantially reduced by Mr Thorpe's failure to take advantage of the remedy of judicial review which was pointed out to him in the very letter of 30 July 2004 by which the withdrawal of approval was communicated to him. I note by way of contrast that, so far as one can tell from the report in Pawlowski v Dunnington, in that case the Board's direction which led to the personal liability of the employee was made on 26 April 1995, but it seems quite likely that the employee did not become aware of it until the time when he received a notice made in reliance on that direction from the inspector of taxes in March 1996, by which time the period normally laid down for an application for judicial review was long past.

Leaving those points aside, on the merits Mr Macdonald's case is that the circumstances are such that the Board could not rationally form the opinion which is that which is needed under Section 591B(1) that:

Mr Macdonald put it in his skeleton on the basis that assuming, as the Special Commissioner accepted, that Mr Thorpe honestly believed that he was absolutely entitled, even if he was wrong, the course of events in November and December 1998 were not “facts concerning” the scheme or its administration. I disagree as to that. I cannot accept that proposition. Plainly they were facts concerning the scheme and its administration.

Mr Macdonald did not put the case in this way in his oral argument. Instead he argued that the Revenue did not take into account the position of the contingent beneficiaries when they withdrew approval, who would be prejudiced by that approval. As to that, first of all I see no reason why the Board should have taken account of the interests of contingent beneficiaries in the circumstances and, secondly, by the time that they did withdraw approval there was no scope for any interest to arise, at any rate under Rule 6, because by then Mr Thorpe had long since retired.

Mr Macdonald also said that the Revenue had failed to take into account Mr Thorpe's motives for doing what he did, namely that he regarded an annuity as an unsatisfactory alternative for having the whole sum under his control. He also submitted that the Revenue could and should have threatened the withdrawal of approval rather than proceeding directly to it, giving Mr Thorpe in that way time to think better of what he had done. As to that there had been correspondence, admittedly somewhat sporadically, from time to time over several years. Mr Thorpe had plenty of time and opportunity to think better of his position nor was it in my judgment necessary for the Revenue to warn him of the possible action that might be taken.

So far as the Revenue's failure to take into account his unwillingness to accept the benefits in accordance with the provisions of the scheme, that is no doubt an attitude that may well be taken by many sole directors and sole employees under small self-administered pension schemes. It does not seem to me that that is a matter that the Inland Revenue is required or possibly even entitled to take into account given that it is wholly inconsistent with the basis on which such schemes obtain tax relief.

The essence of the reasoning in the 30 July 2004 letter is set out in two paragraphs, which have been assigned the numbers 16 and 17, which I will read:

To conclude, therefore, in my judgment the assessment to tax under section 591C was justified because Mr Thorpe's point under Saunders v Vautier was wrong and the whole fund was held to be applied for the purposes of the scheme immediately before the date as at which scheme approval was withdrawn. Furthermore the argument based on a potential challenge to the withdrawal of approval as a matter of public law fails, first because it is not relevant to a statutory appeal, second because it is far too late to take the point and thirdly because, as it seems to me, the Board's decision appears to have been entirely rational and justified in any event. Those are the reasons for which I would dismiss this appeal.

I agree.

I also agree.