Taxation of Unauthorised Pension Payments | What You Need to Know About HMRC Investigations

In this article we explore a recent Tax Tribunal ruling concerning income tax on unauthorised pension payments. While this article focuses on pensions, the Tax Tribunal adjudicates a broad spectrum of both direct and indirect tax disputes. The tax litigation lawyers at KANGS regularly represents individuals and corporate clients in a wide range of proceedings before the Tax Tribunal, and have over twenty-five years of experience in HMRC disputes and appeals.

In the recent case of Larry Trachtenberg v The Commissioners for HM Revenue and Customs, the Upper Tribunal (Tax and Chancery Chamber), when dismissing an appeal by Larry Trachtenburg, confirmed HMRC's power under section 29 of the Taxes Management Act 1970, to assess amounts chargeable to income tax under sections 208 and 209 of the Finance Act 1994 in respect of unauthorised pension payments.

Tax rules set out conditions for payments to be authorised, and any payment not meeting these conditions is classed as unauthorised. For example, withdrawing pension funds before age fifty-five without meeting the required ill health criteria is an unauthorised payment.

HMRC had previously issued assessments against Mr Trachtenberg for unauthorised payments made to him from his pension scheme in the tax years 2006/07 and 2009/10. These payments were used by him to repay loans, which were deemed unauthorised under sections 208 and 209 of the Finance Act 2004.

Mr Trachtenberg appealed against these assessments to the First-tier Tribunal (Tax Chamber) which dismissed his appeal where he relied on three grounds.

Undaunted, Mr Trachtenberg then appealed to the Upper Tribunal challenging HMRC on only one of the three grounds previously presented, being that the statutory provision relied on by HMRC to issue the assessments, cannot be used to recover the amounts said by HMRC to be assessable.

Hamraj Kang of KANGS outlines the relevant law and the Court Judgment.

The Law Relevant to the Appeal

The Finance Act 2004 provides as follows:

S. 208 Unauthorised payments charge

A charge to income tax, to be known as the unauthorised payments charge arises where an unauthorised payment is made by a registered pension scheme.

The person liable to the charge:

• in the case of an unauthorised member payment made to or in respect of a person before the person’s death, is the person,

• in the case of an unauthorised member payment made in respect of a person after the person’s death, is the recipient and

• in the case of an unauthorised employer payment is the person to or in respect of whom the payment is made.

The rate of the charge is 40% in respect of the unauthorised payment.

An unauthorised payment may also be subject to the:

• unauthorised payments surcharge under section 209, and a

• scheme sanction charge under section 239.

S.209 Unauthorised payments surcharge

A charge to income tax, to be known as the unauthorised payments surcharge, arises where a surchargeable, unauthorised payment is made by a registered pension scheme.

Surchargeable unauthorised payments means:

• surchargeable unauthorised member payments,

• surchargeable unauthorised employer payments.

In addition to the 40% charge under s.208, an additional 15% charge can arise under this section.

S.255 Assessments

The Board of Inland Revenue may by regulations make provision for and in connection with the making of assessments in respect of, inter alia, the

• unauthorised payments charge,

• unauthorised payments surcharge.

The provision that may be made by the regulations includes (in particular) provision for the charging of interest on tax due under such assessments which remains unpaid.

Taxes Management Act 1970 (‘TMA 1970’)

This is the provision which lies at the heart of the appeal.

S. 29 Assessment where loss of tax discovered.

If an officer of the Board or the Board discover, as regards the taxpayer and a year of assessment that:

• any amount of income tax or capital gains tax which ought to have been assessed but has not been assessed,

• an assessment to tax is or has become insufficient, or

• any relief which has been given is or has become excessive,

the officer or, as the case may be, the Board may, subject to any relevant subsections, make an assessment in the amount, or the further amount, which ought in his or their opinion to be charged in order to make good to the Crown the loss of tax.

The Appeal to the Upper Tribunal

Basis of the Appeal

Mr Trachtenberg had previously submitted three grounds of appeal to the First-tier tribunal:

• that s.29 TMA 1970 cannot be used to recover amounts which are chargeable to tax under s.208 and s209 Finance Act 2004,

• if s.29 TMA 1970 can so be used, whether HMRC have shown that he acted deliberately in failing to return the chargeable amounts in his self-assessments returns (as required by s.29(4) TMA 1970),

• whether s.268 the Finance Act 2004 applies to remove the surcharge for the 2007 year.

The First-tier Tribunal found in favour of HMRC on all three grounds. Mr Trachtenberg only appealed to the Upper Tribunal concerning s.29 TMA 1970 and whether it extends to an assessment to income tax arising under sections 208 and 209.

If the appeal succeeded on that single ground, then the result would be that HMRC’s assessments were invalidly raised.

The Tribunal’s Findings

The Tribunal agreed with the First-tier Tribunal’s statement that:

"…the purpose of the unauthorised payment regime is to deter people from accessing their pension funds other than in circumstances permitted by the pensions regime."

It stated that "one of the main ways it achieves that purpose is by imposing a charge to income tax on certain payments. The purpose of sections 8 and 9 TMA 1970 is to oblige taxpayers to make a self-assessment return which assesses ‘amounts in which …the person making the return is chargeable to income tax and capital gains tax for the year of assessment."

The Tribunal found that the assessments were validly raised and, accordingly, the appeal was dismissed thereby affirming HMRC’s authority to assess unauthorised pension payments under existing legislation. This decision reinforces the integrity of the self-assessment regime and the enforceability of tax charges related to pension schemes.

The extremely detailed and complex ruling of the Tribunal contained some cautionary guidance:

Mandatory Reporting of Unauthorised Payments

• Taxpayers must include unauthorised pension payments and surcharges in their self-assessment returns for the tax year in which the payment was made. These charges are not optional or discretionary but are statutory liabilities arising at the time of payment which must be declared.

Exposure to Discovery Assessments

• Failure to report unauthorised payments can lead to HMRC issuing discovery assessments under section 29 of the TMA 1970 which may be retrospective and include interest and penalties if the omission is deemed negligent or deliberate.

Tax Year Alignment

• The liability for unauthorised payments is tied to the specific tax year in which the payment occurred requiring taxpayers to be diligent in tracking the timing of pension-related transactions and ensuring they are reported in the correct year.

Financial Consequences

• Unauthorised payments attract a 40% income tax charge under section 208 the FA 2004, and potentially, an additional 15% surcharge under section 209.

Relief Applications - Do Not Delay Liability

• Even if a taxpayer intends to apply for relief under section 268 the FA 2004 to discharge a surcharge, the liability must still be reported in the self-assessment return. Relief is not automatic and does not suspend the obligation to declare the charge.

How Can We Help?

Disputes involving HMRC are, by definition, inherently complex and often span events which have occurred over several years. Whether you have received a Notice of Enquiry into your Self-Assessment Return, a Discovery Assessment or are subject to a HMRC tax investigation, these matters if managed incorrectly, may result in serious financial or legal consequences.

Our specialist solicitors have extensive experience in representing clients in HMRC related proceedings, including tax investigations, VAT assessments, tribunals and complex tax disputes. We understand the intricacies of tax law and will work tirelessly to protect your rights and achieve the best possible outcome.

For tailored advice and a confidential consultation, please contact us using the details below. We are here to provide the robust legal support you need to navigate your HMRC matter with confidence.

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