Spc00654

INCOME TAX – ASSESSMENT – PENSION SCHEME – transfer of deferred pension benefits between pension schemes – transfer unauthorised – the Appellant  not an employee of the company which was a  requirement of the second pension scheme – Appellant assessed for the tax due on the unauthorised transfer – assessment good – Appeal dismissed 

SPECIAL COMMISSIONERS

	CHRISTOPHER JOHN DUNNE	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Special Commissioner: MICHAEL TILDESLEY OBE	

Sitting in public in London on 8 October 2007

The Appellant did not appear

Ingrid Simler QC, counsel instructed by the Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION
The Appeal
1.	The Appellant was appealing against an amendment dated 19 December 2005 to his self assessment return for the year ending 5 April 2002 which showed an increase in tax liability of £14,160.06, and an overall liability of £17,155.49.
The Dispute
2.	The dispute concerned whether the transfer of the Appellant’s accrued pension benefits from the Lattice Group Pension Scheme to the Holme Limited Pension Plan which took place in September 2001 was chargeable to tax. The Appellant asserted that he had received no payment from the pension schemes and that he was an employee of Holme Limited. The Respondents contended that the transfer was a sham, devised to enable the Appellant to gain access to accrued pension benefits in advance of retirement.  They submitted that the Appellant was not an employee of Holme Limited. Further the Appellant obtained early payment from the pension fund in the form of a loan.
3.	Section 600 Income and Corporation Taxes Act 1988 (ICTA) provides that a person is chargeable to tax on payments out of an approved pension scheme unless the payment out of the scheme is expressly authorised by the rules of that scheme. A transfer of funds from one approved pension scheme to another is not chargeable to tax provided the transfer is authorised by both schemes and complies with the rules of the respective schemes. In this Appeal the Respondents considered that the transfer did not comply with the rules of the Holme Limited Pension Plan, which required members of its scheme to be employees of Holme Limited. They contended that the Appellant was not an employee of Holme Limited, and, therefore, the transfer of funds from Lattice Group Pension Scheme to Holme Limited Pension Plan was subject to tax. 
4.	Under section 203 ICTA and Income Tax (Pay As You Earn) Regulations 2003 the Trustees of the Lattice Group Pension Scheme were liable to pay the tax charged on the funds paid out to Holme Limited Pension Plan in respect of the Appellant. However, on 15 March 2006 the Respondents issued a direction under regulation 72(5) the 2003 Regulations which excused the Trustees from liability to pay the tax. The Respondents were satisfied that the Trustees had taken reasonable care to comply with the 2003 Regulations and their failure to deduct the tax under PAYE was due to an error made by them in good faith. 
5.	 The Appellant did not appeal against the direction issued on 15 March 2006, in which case he was liable to pay the tax on the money paid out of the Lattice Group Pension Scheme to Holme Limited Pension Plan. The Appellant can avoid liability if he demonstrates on the balance of probabilities that he was an employee of Holme Limited. The Appellant accepted that funds had been transferred between the named pension schemes. The sole dispute was whether the Appellant was employed by Holme Limited.
6.	The Lattice Group Pension Scheme and the Holme Limited Pension Plan are hereinafter referred to as Lattice Scheme and Holme Scheme repectively.
Preliminary Matter
7.	On 21 September 2007 the Appellant requested postponement of the hearing on 8 October 2007 because his wife was quite ill. On 25 September 2007 I refused his application but advised that if he wished to make a further postponement application he should provide details of his wife’s health from her doctor. On 2 October 2007 the Appellant submitted a further request for postponement on the ground that he had only received the Respondents’ witness statements on 1 October 2007, and that he required more time to seek legal advice.  On 5 October 2007 I refused his request because he had sufficient time to prepare for his Appeal which was lodged with the Special Commissioners in June 2006.  I advised the Appellant to attend the hearing, as I may decide to hear the Appeal in his absence. Further he was invited to put forward additional information to support his application, in particular a doctor’s letter regarding the state of his wife’s health. The Special Commissioners Office arranged for the Appellant to attend the Manchester Tribunal Centre on the 8 October 2007 to make his application by video link. 
8.	The Appellant decided not to attend the Manchester Office. He supplied no additional information regarding his postponement application. I decided to deal with his postponement application afresh as a preliminary matter at the hearing on 8 October 2007. The Respondents objected to postponement of the Appeal hearing.
9.	After considering the Appellant’s written requests and the Respondents’ submissions, I turned down the Appellant’s request for postponement. I decided that the Appellant had failed to satisfy me of a good and sufficient reason for his absence. I, therefore, proceeded to hear the Appeal in his absence in accordance with regulation 16 of Special Commissioners Regulations 1994/1811. In reaching my decision I took account of the following matters:
(1)	The chronology of the Appeal which demonstrated that the Appellant persistently failed to comply with the requirements of the Tribunal and co-operate with the Respondents in exchanging documents. In particular the Appellant did not comply with the standard directions issued by the Special Commissioners. He failed to provide details of available dates. He did not attend hearings at the Manchester Tribunal Centre despite video link arrangements being made. 
(2)	 The Appellant had ample time to prepare his Appeal. His Notice of Appeal was lodged with the Special Commissioners on 15 June 2006. He was aware of the Respondents’ case from 2003 when he received several letters setting out their concerns about the transfer of pension benefits. On 21 February 2006 Mr Bush advised the Appellant to obtain independent tax and pensions advice. Further Mr Bush clearly set out in his letter the disputed issue regarding the Appellant’s employment status with Holme Limited.  On 25 September 2007 the Appellant received Mr Bush’s witness statement and exhibits which constituted the bundle of documents presented at the hearing.
(3)	 The Appellant first raised the issue of his wife’s health on 19 June 2007 when he advised that his wife had undergone surgery to remove a tumour from her spine.  The Office of Special Commissioners invited him to make a formal application to postpone the listing of his Appeal pending his wife’s ill-health and supply available dates. On 20 July 2007 the Special Commissioners’ Office received a letter from the Appellant simply stating that he was an employee of Holme Limited and that he did not see the need for further correspondence. On 24 July 2007 the Office of Special Commissioners wrote out asking for available dates in October – December 2007. The Appellant did not respond to that letter.  On 15 August 2007 the Appellant was informed of the hearing date of 8 October 2007.  He waited until 24 September 2007 to request an adjournment based on the state of his wife’s health.  The Appellant has not supplied the Office of Special Commissioners with correspondence from a doctor or a hospital confirming the state of his wife’s health. Further the Appellant has not provided an explanation why his wife’s health prevented him from attending the hearing on 8 October 2007.  The Office of Special Commissioners has given the Appellant several opportunities to substantiate the circumstances surrounding his wife’s health, which he has failed to take up. Having regard to the above information, I was not convinced that his wife’s health was a valid reason for postponing the hearing. 
The Evidence
10.	I heard evidence from Alan John Bush who was employed by the Respondents as a Pensions’ Investigator and James McCorquodale. Mr Bush supplied detailed evidence of the two pension schemes, Holme Limited and the investigation of the Appellant.  Mr McCorquodale was in a similar position to the Appellant in that he had been charged tax on the transfer of funds from a pension scheme to the Holme Scheme, and also suffered a penalty. Mr McCorquodale gave first hand evidence of his dealings with Holme Limited, which included the arrangements for gaining early access to his pension benefits, and his purported employment with Holme Limited. The Respondents relied on Mr McCorquodale’s evidence to demonstrate the nature of his relationship with Holme Limited, which in the Respondents’ view was typical of the arrangements made by Holme Limited with other taxpayers including the Appellant. I placed weight on Mr McCorquodale’s evidence. The Respondents did not give him preferential treatment because of his evidence. Mr McCorquodale was required to pay £400,000 to the Respondents in respect of the tax charge and penalty. 
 The Facts Found
11.	From 1 April 1980 to 31 August 1996 the Appellant was a member of the Lattice Scheme (formerly the British Gas Pension Scheme). Under the rules of the Lattice Scheme, Mr Dunne was only entitled to a pension from his 60th birthday on 30 December 2019.
12.	The Lattice Scheme was an approved occupational pension scheme at all relevant times.  Under its rules the Trustees had the power to use the cash equivalent of his benefits in that scheme to acquire benefits under another scheme that satisfied the prescribed requirements under the Pensions Schemes Act 1993 (in other words to transfer out to another approved pension scheme if the trustees of the receiving scheme were able and willing to accept the transfer).
13.	 The Holme Scheme was granted HMRC approval on 13 July 2001 with effect from 1 February 2001. Under its rules the trustees could accept a transfer from another pension fund in respect of a member of the Holme Scheme. A person could only be a member if he was an employee of Holme Limited.
14.	 Holme Limited described itself in its brochure as International Sales and Marketing Consultants with the aim of becoming one of the United Kingdom’s leading specialist marketing, sales and affinity scheme consultancies. The brochure explained that staff automatically became a shareholder of Holme Members Limited, a not-for-profit company which existed purely for the benefit of staff. The booklet, however, mentioned just two benefits: membership of a pension scheme and a loan facility at preferential rates.
15.	Under the Holme Scheme staff employed by Holme Limited would automatically enrol into a non-contributory pension scheme into which Holme Limited would contribute £25 per month (£300 per annum).   The brochure stated that members may transfer any deferred pension benefits that they have with a previous employer or insurance company and that staff can find out the transferable value of such pension benefits by completing a form enclosed with the welcome pack. That form authorised Holme Ltd to obtain  information about pension benefits from a  previous employer or insurance company.
16.	I agree with Mr Bush’s statement that Holme Limited was incorporated for the sole purpose of assisting people to gain access to accrued pension benefits in advance of their retirement.
17.	On 21 March 2001 Holme Limited requested from the Lattice Scheme details of  the current fund and transfer values of the  Appellant’s  pension benefits. In their request Holme Limited referred to the Appellant as one of its employees. On 7 August 2001 Holme Limited informed the Lattice Scheme that the Appellant wished to transfer his non-protected rights benefits amounting to £43,632.88 to the Holme Scheme. The transfer of funds was completed on 24 September 2001.
18.	On 26 September 2001 the Members Insurance Company issued the Appellant with a Single Premium Annuity.  The premium for the annuity was £43,632.88. Payment under the annuity would commence on 30 December 2034 (the Appellant’s 75th birthday) with a monthly payment of £1,351.78.
19.	On 28 September 2001 the Members Finance Company made a loan to the Appellant in the sum of £33,600.  The loan was secured against the Single Premium Annuity issued on 26 September 2001 and was to be repaid on or before 30 December 2034. In the event of non-repayment of the loan by the said date the Appellant would forfeit all claims to the Single Premium Annuity which would be treated as full and final settlement of the loan debt granted by the Members Finance Company. 
20.	Mr Bush noted that the value of the loan represented 77 per cent of the monies received by the Trustees of the Holme Scheme from the Lattice Scheme.  Mr Bush concluded that the Holme Scheme Trustees had charged the Appellant £10,032.88 (23 per cent of the sum transferred) for arranging the transfer and the loan. I agree with Mr Bush’s conclusion. 
21.	The Members Insurance Company and the Members Finance Company were both registered in Niue (an island in Polynesia).
22.	The P35 (employer’s annual return) for Holme Limited for the year 2001/02 revealed that its total number of employees were 308, from whom no National Insurance had been deducted, and between £4.40 and £52.80 had been deducted in tax from each employee.  The Appellant was recorded on the P35 with a tax deduction of £17.60 which indicated an annual income of £80.  The 2001/02 P14 (end of year summary) of Holme Limited reported that the Appellant commenced employment on 1 July 2001 and left on 26 October 2001. The Appellant did not declare his income from his employment with Holme Limited in his self assessment return for 2001/02. Holme Limited ceased trading in 2002 and was eventually dissolved on 21 September 2004.
23.	Mr Bush was unable to find out from Holme Limited any details about the work undertaken by the Appellant or any of its employees. On 30 September 2005 Mr Meadows of HM Revenue and Customs wrote to the Appellant asking detailed questions about his employment with Holme Limited and to supply a copy of his contract of employment. The Appellant did not respond to Mr Meadows’ letter. On 9 December 2005 Mr Meadows phoned the Appellant requesting answers to his questions. The Appellant informed Mr Meadows that his financial adviser would respond to Mr Meadow’s letter of 30 September 2005.  The Appellant has not provided a detailed response to Mr Meadow’s questions.
24.	Mr Bush built up a picture of the arrangements set up by Holme Limited by interviewing other people in the Appellant’s situation of whom Mr McCorquodale was typical. Mr Bush considered that the description of the arrangements provided by Mr McCorquodale applied equally to the Appellant.
25.	Mr McCorquodale was contacted by Mr Durkin of Holme Limited with a proposition to obtain money from pension schemes which would be free of tax. Mr Durkin assured Mr McCorquodale that the proposition was lawful which was apparently  supported by an opinion from a Queen’s Counsel.
26.	The proposition was that Mr McCorquodale would be employed by Holme Limited which would give him membership of the Holme Scheme. This membership would enable the transfer of Mr McCorquodale’s accrued pension benefits from his existing pension fund into the new pension scheme. The Trustees of the Holme Scheme would then purchase a deferred annuity from an offshore company from which Mr McCorquodale would obtain a loan secured against the annuity.  Mr McCorquodale would not be expected to repay the loan. He would simply forfeit any claim to the annuity when the loan became repayable on his 75th birthday. In June 2001 Mr McCorquodale signed various documents authorising the transfer of his accrued pension benefits from his existing pension scheme into the Holme Scheme. On the same day, 10 August 2001, his previous pension fund paid over his accrued pension funds to the Holme Scheme, Mr McCorquodale received £849,000 (86 per cent of the amount transferred between the funds) from the Trustees of the Holme Scheme.  Mr McCorquodale negotiated a fee of 15 per cent with Holme Limited for the pension fund transfer and the loan.
27.	Mr Durkin advised Mr McCorquodale that he would not be expected to do any work for Holme Limited. Mr McCorquodale was told to declare on his tax return that he received £450 from the sale of 15 “Classic Breaks” brochures at £30 each.  The brochures contained a voucher which can be used by two people to obtain a discount from the 250 hotels listed. Mr Durkin did not give Mr McCorquodale any brochures to sell.
28.	Holme Limited did not interview Mr McCorquodale for any position of employment. Mr McCorquodale did not complete an application form for the job. He, however, received a contract of employment. The terms of which allowed Mr McCorquodale to choose his area of operation. Under the contract there were no fixed hours of work but Mr McCorquodale was expected to devote such of his time to work as may be required to achieve the necessary standards as discussed with his area manager. Holme Limited gave no instruction to Mr McCorquodale about the necessary standards. The contract contained no details of disciplinary procedure, arrangements for holiday and sick pay, and notice provisions to terminate his employment. The contract, however, specified that Mr McCorquodale was eligible to join the company pension scheme.
29.	Mr Bush’s conversations with other people who claimed to be employees of Holme Limited corroborated Mr McCorquodale’s description of the nature of his employment with Holme Limited.  Most of the other people confirmed that Holme Limited told them that they did not have to do any work. Some of them had never tried to sell the Classic Brochures. None of them could provide evidence of sales.
Reasons for Decision
30.	Under section 600 of ICTA the Appellant was chargeable to tax on the transfer  of  his non-protected rights benefits amounting to £43,632.88 from the Lattice Scheme to the Holme Scheme unless he could demonstrate that the transfer  was expressly authorised by the rules of the Lattice Scheme. The Respondents contended that the transfer was not authorised because it was not in accordance with the Holme Scheme Rules, in that the Appellant was not an employee of Holme Limited.  The Appellant accepted that funds had been transferred between the named pension schemes. The sole dispute was whether the Appellant was employed by Holme Limited.
31.	The criteria for determining whether a contract of employment exists have been considered by the Higher Courts in several reported cases. In Ready Mixed Concrete (South East) Limited v Minister of Pensions and National Insurance [1968] 2 QB 497 MacKenna J identified the following criteria: 
“A contract of service exists if three conditions are fulfilled.
(i) The servant agrees that in consideration of a wage or other remuneration he will provide his own work and skill in the performance of some service for his master. 
(ii) He agrees expressly or impliedly that in the performance of that service he will be subject to the other's control in a sufficient degree to make that other master.
(iii) The provisions of the contract are consistent with its being a contract of service.
…As to (i). There must be a wage or other remuneration. Otherwise there will be no consideration, and without consideration no contract of any kind. The servant must be obliged to provide his own work and skill. Freedom to do a job either by one's own hands or by another's is inconsistent with a contract of service, though a limited or occasional power of delegation may not be.”
32.	The test articulated by MacKenna J   has been applied and followed in many subsequent cases, including Nethermere (St Neots) Ltd v Taverna & Gardiner [1984] IRLR 240 at 245 (Stephenson LJ), Hall (Inspector of Taxes) v Lorimer [1994] ICR 218 (CA) and Clarke v Oxfordshire Health Authority [1998] IRLR 125 at paragraph 22 (Sir Christopher Slade). The irreducible minimum of mutual obligation  necessary to create a contract of service was a contractual obligation on the employer to provide work and on the worker to do it when offered (Carmichael v National Power [2000] IRLR 43, paragraph 18, Lord Irvine of Lairg LC).
33.	The onus was upon the Appellant to persuade me on the balance of probabilities that he was employed by Holme Limited. He declined to co-operate with Mr Meadow’s enquiries about his employment status. The Appellant has supplied no evidence of his employment to the Respondents and the Tribunal.  The Respondents were under no obligation in this Appeal to demonstrate that the Appellant was not an employee of Holme Limited. They were entitled to base their case upon whether the Appellant has discharged his evidential burden on the question of employment. The Respondents, however, have not restricted their opposition to the Appeal to the Appellant’s burden but have called evidence of the nature of the relationship between Holme Limited and other people in the same position as the Appellant.
34.	I found Mr McCorquodale’s evidence compelling.  He described a situation where he was not expected to do any work for Holme Limited, and given no instructions on how to carry out his employment duties. Mr McCorquodale was entitled to choose where and when he worked. Holme Limited did not give him any Classic Brochures to sell. His contract of employment contained no provisions about notice to terminate, holiday and sickness pay, and disciplinary procedures.  His relationship with Holme Limited bore no hallmarks of an employment relationship. There was no evidence of the irreducible minimum of mutual obligation between Holme Limited and Mr McCorquodale necessary to create a contract of service. 
35.	I am satisfied that Mr McCorquodale’s description of his relationship with Holme Limited was typical of the arrangements entered into by Holme Limited with other people including the Appellant.  The Appellant’s period of purported employment with Holme Limited from 1 July 2001 to 26 October 2001 was short and coincided with the transfer of his deferred pension benefits and the receipt of the loan. I find that the “employment” relationship between the Appellant and Holme Limited was a sham, operating as a cover to enable the Appellant to draw out pension benefits in advance of his retirement.  The Appellant has supplied no evidence to contradict my conclusion that his “employment” with Holme Limited was a sham.  I hold that the Appellant was not employed under a contract of service with Holme Ltd.
Decision
36.	I dismiss the Appeal. The Appellant was chargeable to tax under Schedule E pursuant to section 600 ICTA on the transfer payment of deferred benefits from the Lattice Scheme to the Holme Scheme. I uphold the assessment. 

               

                                 MICHAEL TILDESLEY OBE
SPECIAL COMMISSIONER
RELEASE DATE: 11 December 2007

LON/