John Mander Pension Scheme Trustees Ltd v HM Revenue & Customs

The issue in this appeal is whether the Commissioners for Her Majesty’s Revenue and Customs have assessed the appellant for tax in the wrong tax year. The First Tier Tribunal [2011] UKFTT 686 (TC) and the Upper Tribunal [2013] UKUT 051 (TCC) concluded that the correct year of charge was the tax year to 5 April 2001. The appellant seeks to establish in this appeal that the correct tax year was to 5 April 1997.

The appellant is the sole trustee and administrator of the John Mander Limited Director’s Pension Scheme. On 19 April 2000 the Revenue gave notice of withdrawal of approval of the John Mander Scheme. The letter told Louvre Trustees Limited, the trustees at that time:-

On 27 July 2000 an assessment was made against those trustees, as administrators of the scheme under Case VI, Schedule D, in the sum of £475,200, being 40 per cent of the estimated value of Mr Mander’s pension fund as at 4 November 1996. The year of assessment was stated to be 2000/2001. The trustees appealed the assessment and sought, unsuccessfully, for permission to apply for judicial review of the Board’s decision to withdraw approval. Once Louvre Trustees Limited had resigned, the appellant was appointed in its place on 12 March 2002. On 22 January 2007 the Revenue issued a protective assessment. That second protective assessment was in respect of the same tax year as the earlier assessment, 2000/2001. This appeal turns on whether the assessment was in respect of the wrong year, 2000/2001, or should have been, as the appellant contends, 1996/1997.

The tax charge is imposed by s.591C TA 1988. The charge was introduced by s.61 of the Finance Act 1995. TA 1988 had previously made provision for the Board of Inland Revenue to approve certain pension schemes (see s.591 TA 1988). Approval had significant tax advantages (identified in s.592 and the following sections). The Finance Act 1991 introduced new sections in this part of the 1988 Act. Section 591A identified the effect on approved schemes of regulations made under s.591. By s.591A(2):-

The Finance Act 1991 also introduced s.591B(1) which conferred power on the Board to withdraw approval if it was of the opinion that facts concerning an approved scheme or its administration ceased to warrant continuance of the approval. If the Board did reach that view it was required in the notice of withdrawal to specify a date from which approval ceased to run. Section 591B(1) reads:-

The Finance Act 1991 also introduced a third way in which approval might cease. Again, like s.591A(2), approval is not withdrawn. It merely ceases to apply once an alteration is made to a retirement benefit scheme (unless the alteration is itself approved by the Board or is within a specified class). Section 591B(2) reads:-

It is plain, therefore, that approval might cease by the operation of any one of the three methods introduced by the Finance Act 1991. But each of those methods is described in a different way. Under s.591A(2) operation of the Regulations, the scheme “shall cease to be approved”; under s.591B(1) the Board may “withdraw their approval” and under s.591B(2) “no approval shall apply”.

As I have already indicated, s.61 of The Finance Act 1995 introduced a tax charge in circumstances where approval had ceased in any one of the three ways identified in s.591A or s.591B. Section 591C provides:-

Section 591C(1) imposes the charge to tax. Mr Sykes, for the appellant, was disposed to accept that it was that sub-section which introduced the charge, although he had an alternative argument that it was imposed under sub-section (2). It seems to me clear that the tax is imposed in the circumstances identified in the first part of s.591C(1), that is, where an approval of the scheme ceases to have effect. Since the tax imposed was income tax, s.591C(2) identifies the Case under which tax is to be charged and the rate at which it is to be charged. But, there is no further identification of the year in which the tax falls to be charged other than the indication in the first part of s.591C(1) that it should be charged where an approval of a scheme ceases to have effect.

Section 591C(1) goes no further because it has to cater for the three different ways in which approval of a scheme ceases to have effect. Whilst the consequences of each of the three provisions in s.591A(2), in s.591B(1) and in s.591B(2) may compendiously be described as provisions under which approval ceases to have effect, the provisions themselves operate in three different ways to bring about the consequence that approval ceases to have effect.

For that reason, supplementary provisions in s.591D(7) provide:-

The first part of s.591D(7) recall the three different methods by which approval of a scheme ceases to have effect. Under s.591D(7)(a) approval ceases to have effect when the scheme ceases to be an approved scheme by the operation of the s.591 Regulations. Where the scheme was approved before the day on which those Regulations came into effect, that will be at the end of the period of 36 months beginning with the day on which the s.591 Regulations came into force provided the scheme contains a provision of a prohibited description or does not contain a provision of a required description. Accordingly, tax charged where approval ceases to have effect by virtue of the operation of s.591A(2) shall be for the year in which the 36 month period comes to an end. Under s.591B(2) the year of charge may similarly be identified by reference to the event which led to approval ceasing to have effect. The charge arises in the year in which an unapproved alteration is made in the retirement benefits scheme.

Section 591B(1) differs from s.591A(2) and s.591B(2) because it encompasses two different stages and thus two different dates. It refers firstly to the Board’s withdrawal of approval. This will usually be some time after the events which warrant such withdrawal. Secondly, it refers to the time from which the Board decides the cessation of approval will run. The earliest date will be the date when facts first ceased to warrant continuance of approval or 17 March 1987, or it could be from a later date as specified in the notice. The date of withdrawal of approval and the date specified in the notice are most unlikely to be the same, whereas under s.591A(2) and s.591B(2) there can only be one date when approval ceases to have effect, namely, the date when either of those two sub-sections bites.

Mr Sykes argued that under s.591(B)(1) the date when approval ceased to have effect was not the date when the approval of the scheme was withdrawn. It was the date specified in the notice of 5 November, 1996 in the tax year 1996/1997. Neither of the assessments charged tax in that year and, accordingly, they were either invalid or, if they had assessed the appellant to tax in that year, they were out of time.

His submission rested in part upon the impact of the opening full-out words of s.591D(7). The use of the expression “approval of a scheme ceasing to have effect” must refer, he said, to the date specified in the notice, that is, 5 November 1996 and not the date when the Revenue gave notice of withdrawal. That seems to me to ignore the plain words of s.591D(7)(b). Those words make it clear that the date, for the purposes of s.591C(1) when the charge to tax arises, is the date when approval of the scheme is withdrawn and not the date specified in the notice from which approval ceases to continue.

Mr Sykes then referred to the full-out words at the end of s.591D(7):-

There was no dispute but that the date of cessation of approval means what it says. It was 5 November 1996. Neither the appellant nor the Revenue argued that the date of cessation of approval meant the date of withdrawal of approval. Indeed, the Revenue relied upon that provision to justify the quantification of the charge by reference to the value of the assets at midnight on 4 November 1996. But, in my view, it does not follow that the reference in s.591C(1) is to the same date.

It is necessary to draw attention to the contrast between the words “approval of a scheme ceasing to have effect” and “the date of the cessation of the approval” in s.591D(7). It is no accident that that different wording is adopted. There is only one place in s.591C where the expression “approval ceases to have effect” is used. That is in s.591C(1). But there are a number of references within s.591C to the “date of the cessation of the approval”.

It is used in s.591C(2), for the purposes of quantifying the charge and valuing the assets. It is used in all three of the conditions which must be satisfied before s.591C applies. The first condition in s.591C(5) sets the maximum number of individuals who may be members of the scheme at a moment immediately before the date of cessation of approval. The second condition under s.591C(6) requires the controlling director of a company which has contributed to the scheme to be a member of the scheme within the period of one year ending with the date of the cessation of the approval of the scheme. The third condition is satisfied again by reference to whether the scheme has received a transfer value or contributions as identified in s.591C(6A) in a period of three years ending with the date of the cessation of approval of the scheme. As Mr Nawbatt pointed out, without demur from the appellant, the provisions could easily be avoided if the date at which the conditions must apply was later than the date specified in a s.591B(1) notice.

It is, accordingly, plain that the reference to the date of cessation of the approval of the scheme must be to the date from which approval ceased to have effect in the ordinary sense of the words. In the instant case that was, according to the notice given by the Board under s.591B(1), 5 November 1996. That is the date from which the Board has decided approval ceases to run. That was common ground. The dispute centres on whether it follows that the opening words of 591C(1) “Where an approval of the scheme to which this section applies ceases to have effect…” must be construed as referring to the tax year in which the date of cessation fell, namely in the year of assessment 1996-1997.

Were that the correct construction it would render the opening words in s.591D(7) unnecessary. Only one date would be relevant to s.591C, that is, the date when approval ceased to have effect. Under s.591A(2), that would be the date the scheme ceased to be an approved scheme by reason of the s.591 Regulations. It would be the date under s.591B(1) specified by the Board in its notice as being the date from which approval ceases to run. Under s.591B(2) it would be the date when the scheme was altered.

Such a conclusion wholly disregards s.591D(7)(b). As I have said, the reference to “the approval of the scheme being withdrawn” is not a reference to the date specified by the Board in its notice but to the date of withdrawal. That is the purpose of the reference to the three different regimes pursuant to which approval ceases to have effect. It is also the purpose lying behind the distinction between the opening words of s.591D(7) which refer only to s.591C(1) and the closing full-out words in their reference to s. 591C. The expression “date of the cessation of the approval” does not figure in s.591C(1). In those circumstances it only makes sense to construe the adverb ‘accordingly’ as it was construed by the First Tier Tribunal “that the date of cessation of approval must be construed according to the section numbers referred to set out in… s.591D(7)” [130]. The charge arises under s.591C(1) when approval of the scheme is withdrawn under s.591B(1). That was within the tax year 2000-2001.

The appellant sought to support its construction by reference to the provisions which introduced s.591C and s.591D. Section 61(3) FA 1995 provided:-

As the appellant rightly points out, that section must be a reference to the time when a scheme ceases to have effect and not to the time of the service of a notice withdrawing approval under s.591B(1). But s.61(3) has no relevance to the proper construction of s.591B which had been introduced in the earlier Finance Act 1991 nor to the proper construction of s.591C. The construction of s.591C, depends upon s.591D(7).

Mr Nawbatt, for the Revenue, additionally pointed out the unfortunate consequences if the appellant was correct as to the payment of interest. If the year of charge was the year the Board specified in its notice under s.591B then those charged to tax would be liable for interest long before the Board had exercised its discretion to withdraw approval; interest would be payable at a time when approval of the scheme was continuing. It seems to me unlikely, if not impossible, that there could be any intention to impose a liability to pay interest during a period, possibly long before, when approval had not been withdrawn but still applied. I reject the suggestion that s.591B(1) could be deployed prospectively. Such a consequence supports the Revenue’s contention that where s.591B(1) applies, s.591C(1) refers to the date of withdrawal of approval and not to the date which the Board specifies in its notice.

The appellant contended, in the alternative, that the charge was imposed by s.591C(2) and not by s.591C(1). But as I have already indicated, the charge is imposed under s.591C(1) in one of the three circumstances where approval of the scheme ceases to have effect. It is not imposed by s.591C(2) which refers merely to the Case under which the tax is imposed and the means by which the amount of tax is to be quantified. I can summarise my views by grateful reference to the decision of the First Tier Tribunal:-

For those reasons, I would dismiss this appeal.

I agree that the appeal should be dismissed for the reasons given by Moses LJ. The taxpayer’s argument that the correct year of assessment is 1996/97 rather than 2000/2001 depends upon treating the words (“where approval of a scheme … ceases to have effect”) in s.591C(1) as determinative not only of the circumstances in which the charge to tax arises but also of the year of assessment to which the charge relates. Only in this way can it be said that the tax arises not in the year in which approval is withdrawn under s.591B(1) but in the year specified in the notice of withdrawal as the date from which approval ceases thereby to have effect.

It is the Appellant’s case that the reference in s.591C(1) to approval ceasing to have effect is a reference in this case to 5 November 1996 but, as Moses LJ has explained, that provision is designed to encapsulate the three ways in which approval may come to an end (two of which are, so to speak, automatic) and not primarily with issues about the year of assessment. So far as s.591D(7) takes the matter any further, it merely confirms the inclusion of all three methods as giving rise to the charge under s.591C(1) and the application of the conditions set out in s.591C(5)-(6A) in all three cases.

The scheme ceases to be approved under s.591B(1) when approval is withdrawn by the notice given by the Board: see s.591D(7)(b). The date of the notice determines the relevant year of assessment. The fact that the notice may and often does specify an earlier date of cessation by reference to when the conditions for approval ceased to be satisfied is irrelevant for this purpose. The charge to tax is occasioned by the effect of the notice but it is the service of the notice which withdraws approval (from the date specified) and which therefore determines the year of assessment in which the charge to tax arises.

I agree with both judgments.