UT/2024/000093 - [2025] UKUT 00206 (TCC)

The provisions in relation to unauthorised payments form part of a “comprehensive and prescriptive pension schemes code” introduced by FA 2004. Contrary to the FTT’s conclusion, the TMA 1970 alone would not enable charges to be assessed under the code in the absence of any express application by section 255 or regulations issued under it.

Examples illustrating that it is a self-contained code are the provisions of sections 149 and 252 FA 2004.

The position is put beyond doubt by section 255(3)(b), which states that regulations under section 255 “may…provide for the application of any provision of the Tax Acts (with or without modification)”. Such words would be unnecessary if section 29 TMA 1970 operated independently.

HMRC may well have believed that there was no need for assessment regulations under section 255 in a case such as this, and that section 29 TMA 1970 could be utilised, but they were mistaken. Parliament had left it to HMRC to implement the necessary regulations, but they had simply failed to do so.

Clause 241(6) gives the Inland Revenue a regulation making power in respect of making assessments of the income tax the scheme administrator is liable for, and which they must make a quarterly return of to the Inland Revenue. The Inland Revenue will also need to have powers to raise other assessments in connection with payment of income tax due under this Part. For example:

My Lords, I shall now permit myself a general observation. Once that it is fixed that there is a liability, it is antecedently highly improbable that the statute should not go on to make it effective. A statute is designed to be workable, and the interpretation thereof by a Court should be to secure that object, unless crucial omission or clear direction makes that end unattainable.

Section 29 begins by referring to a discovery “as regards…a year of assessment”. Income tax is an annual tax and the tax year is a fundamental component of any assessment. Amounts chargeable under sections 208 and 209 are flat rate charges which are not chargeable by reference to any year of assessment, but are “simply freestanding charges which apply on a payment-by-payment basis” (Footnote: ⁵).

Amounts chargeable under sections 208 and 209 are not required to be, and cannot be, self-assessed. The calculation provisions contained in section 30 ITA 2007 (which are in any event applicable in this appeal only to the assessment for the year 2009/10) do suggest that unauthorised pension payments and surcharges should be brought into a taxpayer’s self-assessment, but that is a drafting error. Section 30 is in any event inconsistent with the wording of Step 7 in section 23, which refers to a liability to tax “for the tax year”.

The discretionary nature of the charge under section 209 and the right of appeal against it under section 269 FA 2004 indicate that these charges were not intended by Parliament to be part of the self-assessment machinery. Furthermore, the fact that the section 209 surcharge is capable of being discharged makes it inappropriate to be included in a self-assessment, and, indeed, there is no provision in the self-assessment code for variation of a return on any discharge.

There are several legislative examples of “standalone” tax charges, and the drafter has in each of those cases explicitly spelt out the year in which the relevant income is taxable. That has not been done here, and that was deliberate.

There are other indicators in the code that the charges under sections 208 and 209 are not part of the self-assessment machinery.

Charges arising under sections 208 and 209 FA 2004 are not charges for a year of assessment, and

Such charges are not required to be included in a self-assessment return.

Some principles of statutory interpretation

When considering how Note (5) is to be construed, the following principles are to be borne in mind:

“The courts in conducting statutory interpretation are ‘seeking the meaning of the words which Parliament used’: Black-Clawson International Ltd v Papierwerke Waldhof-Aschaffenburg AG [1975] AC 591, 613 per Lord Reid and the “primary source by which meaning is ascertained” is “the words which Parliament has chosen to enact as an expression of the purpose of the legislation”: R (Project for the Registration of Children as British Citizens) v Secretary of State for the Home Department [2022] UKSC 3, [2023] AC 255 (“Project for the Registration of Children”), at paragraph 29, per Lord Hodge;

“Explanatory Notes, prepared under the authority of Parliament, may cast light on the meaning of particular statutory provisions”: Project for the Registration of Children, at paragraph 30, per Lord Hodge. However, “[e]xternal aids to interpretation … must play a secondary role” and they do not displace the meanings conveyed by the words of a statute that, after consideration of the context, are “clear and unambiguous and which do not produce absurdity”: Project for the Registration of Children, at paragraph 30, per Lord Hodge;

“[I]t is without question a legitimate method of purposive statutory construction that one should seek to avoid absurd or unlikely results”: Project Blue Ltd v Revenue and Customs Commissioners [2018] UKSC 30, [2018] 1 WLR 3169, at paragraph 31, per Lord Hodge. In R (Edison First Power Ltd) v Central Valuation Officer [2003] UKHL 20, [2003] 4 All ER 209, Lord Millett said in paragraphs 116 and 117 that the Courts “will presume that Parliament did not intend a statute to have consequences which are objectionable or undesirable; or absurd; or unworkable or impracticable; or merely inconvenient; or anomalous or illogical; or futile or pointless” but that “the strength of these presumptions depends on the degree to which a particular construction produces an unreasonable result”. That observation was quoted with approval by Lord Scott in Gumbs v Attorney General of Anguilla [2009] UKPC 27, at paragraph 44, and also cited by Lord Kerr in R v McCool [2018] UKSC 23, [2018] 1 WLR 2431, at paragraph 25;

Identifying the purpose of legislation is of “central importance” in construing it: Rossendale Borough Council v Hurstwood Properties (A) Ltd [2021] UKSC 16, [2022] AC 690 (“Rossendale”), at paragraph 10, per Lords Briggs and Leggatt. As this principle has been applied in the context of tax legislation, it involves “determin[ing] the nature of the transaction to which [the statutory provision] was intended to apply and then … decid[ing] whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description”: Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51, [2005] 1 AC 684, at paragraph 32, per Lord Nicholls. “The ultimate question”, Ribeiro PJ said in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46, at paragraph 35, “is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically”;

…

Considering the legislation and case law, we conclude that charges for a year of assessment are income tax charges arising in the tax year for which a particular self-assessment return is made (in this context). The fact that legislation contains provisions which are intended to specify how to identify when certain types of income, and so the associated income tax charges, arise as between different tax years in particular circumstances does not mean that the absence of such identification provisions requires that an income tax charge which arises in a tax year is not to be included in assessing the amount of income tax payable by the taxpayer “for” that tax year.

Most tax legislation concerns charges relating to events which often occur multiple times throughout a tax year (such as dividends and employment income); some events might also offer scope to manipulate a liability to tax in the timing which the legislation needs to deal with. There is also in many cases good reason to aggregate the amounts, to ensure that the correct tax charge can be calculated after taking into account allowances and other appropriate deductions and then considering the relevant applicable rates and thresholds. As such it is unsurprising that legislation sets out provisions to deal with these issues.

The purpose of the unauthorised payment regime is to deter people from accessing their pension funds other than in circumstance permitted by the pensions regime; one would not usually expect multiple such payments to be made in the course of a year. Further, as the charge is a fixed rate relating to each unauthorised payment alone, there is no need to aggregate the amounts to determine the relevant income tax liability. None of this means that a payment is not made in, and thus to be taken into account in assessing the amounts to which the individual is chargeable to income tax for a tax year.

We therefore do not agree with Mr Gordon’s submissions that the absence of such specific allocation details in s208 and s209 means that the charges cannot be “for” a tax year. An unauthorised payment will be made during a tax year and we consider that it is clear that the related income tax charge therefore arises in, and so is “for”, that tax year.

(1A) The tax to be assessed on a person by a self-assessment shall not include any tax which—

is chargeable on the scheme administrator of a registered pension scheme under Part 4 of the Finance Act 2004,

…In Monaghan the taxpayer had not made a self-assessment return (see paragraph [78] of the decision). In this case each of the appellants had done so. That means that HMRC do not need to rely on s 29(1)(a), because s 29(1)(b) applies in the alternative on the basis that HMRC concluded that an assessment to tax (being the self-assessment contained in each of the appellant’s returns) had become insufficient. We note that this was also the approach taken in Clark v HMRC [2017] UKFTT 392 (TC) at [15]. In these circumstances it is not necessary to decide whether the approach taken in Monaghan was correct and we do not propose to do so.

We gratefully adopt the following summary of the provisions in the skeleton argument of counsel for the claimants:

“Section 23 sets out a series of steps which are to be taken “to find the liability of a person (“the taxpayer”) to income tax for a tax year”; “the result [of these steps] is the taxpayer’s liability to income tax for the tax year.”

…

Finally, Step 7 is to add in any amount of tax for which the taxpayer is liable under the miscellaneous charging provisions listed in s 30. The common feature of the provisions listed in s30 is that they impose liabilities to income tax that are not based on any actual amount of income. (For example, where a member of a registered pension scheme receives an “unauthorised payment”, the unauthorised payment is not strictly speaking “income” of any description, but the member is liable to an “unauthorised payments charge” under s 208(2)(a) of the Finance Act 2004 in an amount equal to 40% of the unauthorised payment.)

For 2007/08 onwards, the calculation of a person’s liability to income tax for a tax year is prescribed in exhaustive detail by Chapter 3 of Part 2 of ITA (sections 22 to 32). There was no direct equivalent to these provisions in the previous legislation. The explanatory notes to section 23 of ITA explain that the section “is based on many provisions in the source legislation, in particular section 835 of ICTA”.

In submissions made in writing after the hearing in respect of the application of s268, HMRC submitted that a s209 charge must be included in a self-assessment return. An application for relief under s268 may also be made in the same self-assessment return (ie: in the white box of the return) but could be made in writing at any time within the relevant time limits set out in SI 2005/3452. A taxpayer cannot unilaterally determine that the charge is not due and so the initial requirement to declare the s209 charge is not discretionary: it must be included in the self-assessment tax return.

Mr Gordon contended that it was a surprising interpretation of the legislation that a person be required to pay a charge, and can be liable to interest and penalties for not doing so, whilst the application for discharge is being considered. Further, the legislation does not provide any details as to how a discharge is to be effected, nor for how any interest and late payment penalties are to be dealt with if discharge is granted. Mr Gordon submitted that this supported the view that an application under s268 is a consequence of an HMRC assessment rather than a follow-up to a self-assessed liability. There were also no provisions to permit the reduction of a (tax-based) late return penalty to reflect the removal of a surcharge where a taxpayer had incurred such a penalty in respect of a return which included a s209 charge which had subsequently been discharged on application.

In the case of the interaction of s209 and s268 we consider that it is clear from the legislation that the charge arises when a relevant payment is made and the liability continues to exist unless and until relief is granted. The charge does not arise only when relief is refused. In the circumstances it is entirely possible that penalties and interest might arise. We do not consider that this is particularly surprising in the context of legislation that is intended to deter behaviour. This is not legislation which seeks to tax everyday transactions. With regard to the intention of Parliament invoked in submissions, we consider that the key intention was that people should not generally be able to access their pensions early without a tax charge. The fact that, if they do access their pension early and fail to comply with their self-assessment obligations, there may be complications with penalties and interest does not mean that the s209 charge is in any way discretionary and outside the scope of self-assessment.