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URL: http://www.bailii.org/uk/cases/UKSPC/2008/SPC00683.html
Cite as: [2008] STI 1479, [2008] STC (SCD) 802, [2008] UKSPC SPC683, [2008] UKSPC SPC00683, [2008] STI 147

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Harry Thorpe v Revenue & Customs [2008] UKSPC SPC00683 (19 May 2008)

Spc00683

Self administered pension scheme – Saunders v Vautier – Withdrawal of approval – Benefit under a retirement benefit scheme – Payment not expressly authorised by scheme rules

THE SPECIAL COMMISSIONERS

HARRY THORPE Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Special Commissioner: JULIAN GHOSH QC

Sitting in London on 23 January 2008

John R Macdonald QC, instructed by Mr H Thorpe, for the Appellant

Ingrid Simler QC, instructed by the Solicitor for Her Majesty's Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

This is an appeal by Mr Harry Thorpe ('the Appellant'), who was the administrator and (since 1991) the sole remaining member of a small self-administered pension scheme known as the Juriscommerce Securities Limited Retirement Benefits Scheme ('the Scheme').

The issues before me concern the tax consequences of the Appellant's conduct in relation to the Scheme and, in particular, the consequences of the withdrawal by the Appellant of some £200,000 in December 1998. In short, the Appellant contends that the Scheme had been wound up under the rule in Saunders v. Vautier (1841) Cr. & Ph. 240 and that, accordingly, the withdrawn moneys were his moneys (and, hence, that the withdrawal gave rise to no adverse tax consequences). On the other hand, Her Majesty's Revenue and Customs ('the Respondents') contend that the moneys remained assets of the Scheme and that the conduct of the Appellant in respect of the moneys caused the Board of Inland Revenue to withdraw its approval from the Scheme. On that basis, the Respondents contend that the Appellant, as administrator of the Scheme, became liable upon cessation of approval to tax under Case VI of Schedule D pursuant to section 591C of the Income and Corporation Taxes Act 1988 ('ICTA'). Further, the Respondents contend that the Respondent received payments from an unapproved scheme and, accordingly, is also liable to tax under Schedule E pursuant to section 596A ICTA on the amounts received.

The matter came before me at a hearing in London on 23 January 2008. The Appellant was represented by Mr John Macdonald QC; the Respondents were represented by Miss Ingrid Simler QC.

THE FACTS

There was no substantial dispute of fact between the parties and a statement of agreed facts was prepared in advance of the hearing.

The Scheme was established on 15 March 1979 by a declaration of trust executed by Juriscommerce Securities Limited ('the Company'). The Manufacturers Life Insurance Company Limited ('ManuLife') was the original administrator of the Scheme. The Appellant and his late wife, Kathleen Mary Thorpe ('Mrs Thorpe'), were the only employees of the Company and the only members of the Scheme. The Appellant was also the sole director of the Company until his retirement in 1999.

Mrs Thorpe died on 7 July 1991. The moneys due to Mrs Thorpe under the Scheme were duly paid to her personal representatives.

By a supplemental trust deed dated 1 January 1994, the Scheme became a small self-administered scheme and adopted new rules The Appellant's daughter, Alison Thorpe, and Hartley Pension Management Services Limited ('the Pensioneer Trustee') were appointed as additional trustees to act with the Appellant (who was described in the supplemental trust deed as 'the continuing Trustee').

By clause 2 of the supplemental trust deed, it was agreed and declared that the Scheme would be operated as an exempt approved scheme for the purposes of the Finance Act 1970 ('FA 1970') and that the maximum benefits permitted by the legislation would be paid to each member of the Scheme upon the member's retirement from the Company. By clause 6(g), it was confirmed for the avoidance of doubt that the trustees had no duty, discretion or power to make any payment to any member which exceeded the maximum benefits authorised by the legislation.

Clause 5 of the supplemental trust deed concerned the appointment and removal of trustees. The power of appointment and removal was vested in the Company. By clause 5(b), the Company was obliged to give not less than four weeks notice to any trustee that it required to remove from that office. Clause 5(d) provided that in the event of the death, resignation or removal of any trustee, the continuing trustees should not take any action to execute the trusts of the Scheme until the Company had exercised its power of appointment of a new trustee. By a further deed dated 21 August 1998, the Company was discharged from all obligations in connexion with the trust and the power of appointing and removing trustees was assigned to the Appellant.

On 3 June 1994, the Board of Inland Revenue accepted that the Scheme was an exempt approved scheme for the purposes of section 592 ICTA. The approval related back to 10 April 1979. The Pensioneer Trustee was notified accordingly by a letter from the Inland Revenue Pension Schemes Office dated 10 June 1994.

On 22 July 1994, the Company assigned to the trustees all its title in the ManuLife policy set up under the original scheme. On 4 April 1995, the trustees opened an account with the Chesham Building Society, into which they deposited on or about 19 September 1995 all the funds of the Scheme following the encashment of the ManuLife policy.

By a letter dated 6 November 1998 and addressed to Hartley Pensions Administration Limited (a subsidiary of the Pensioneer Trustee), the Appellant stated that he had reached:

…the view that I should exercise my sole beneficial interest in the fund pursuant to the role [sic] in Saunders v. Vautier.

The letter enclosed a notice dated 5 November 1998 and addressed to the trustees of the Scheme (including the Pensioneer Trustee) in the following terms:

TAKE NOTICE that pursuant to the Trust Deed dated 15th March 1979 and the Supplemental Trust Deed dated the 1st day of January 1994 the said HARRY THORPE is absolutely entitled to the whole beneficial interest declared by the said Trust Deeds AND FURTHER TAKE NOTICE that by virtue of the said Trust Deed and the Rule of Law known as the Rule in Saunders v. Vautier the said HARRY THORPE HEREBY DIRECTS you the said Trustees to transfer to him absolutely all property held by you as said Trustees aforesaid and in particular the Deposit of money held in Account Number 33.00.00428.05 and held in your names at Chesham Building Society, 12 Market Square, Chesham in the County of Buckingham and WE HEREBY inform the Society accordingly.

THIS NOTICE shall take effect on the 2nd day of December 1998

On 12 November 1998, the Pensioneer Trustee wrote to the Appellant enclosing a copy of the undertaking that it had given to the Inland Revenue Pension Schemes Office. The letter informed the Appellant that the Pensioneer Trustee was unable to agree to the monies then held at the Chesham Building Society being paid to the Appellant as that would constitute a termination of the Scheme other than in accordance with the approved winding-up provisions.

By a notice dated 16 November 1998 and addressed to the directors of the Pensioneer Trustee, the Appellant gave notice:

…that pursuant to the powers vested in my by Clause 5 (9) [sic] of the Supplemental Trust Deed of 1st January 1994 Clause (1) of the Deed of Discharge of 21st August 1998, and every other power me enabling I TERMINATE the Office held by your Company of Trustee howsoever called.

The Appellant also sent a covering letter of the same date explaining his actions.

As at 1 December 1998, the sum of £255,768.97 was held in the account in question at the Chesham Building Society.

The Appellant withdrew the sum of £200,000 on 2 December 1998, the sum of £12,000 on 30 December 1999 and the remaining balance of £60,499.19 on 21 July 2000.

On 28 January 2000, the Appellant made a return for the year 1998/1999, in which he declared his income, save for the payment that the Respondents contend ought to have been included because it was made out of the Scheme on 2 December 1998.

The Inland Revenue Pension Schemes Office wrote to the Appellant on 8 February 2000 informing him that a failure to provide an actuarial valuation report would result in approval of the Scheme being withdrawn. The Appellant replied by a letter dated 9 March 2000, in which he informed the Pension Schemes Office that he had become the sole beneficiary of the trusts of the Scheme on 7 July 1991 and that he had wound up the trust pursuant to the rule in Saunders v. Vautier.

By a letter dated 5 June 2000, the Pension Schemes Office informed the Appellant that it was not satisfied that the Pensioneer Trustee had been correctly removed. It also stated that the Appellant was unable to wind up the Scheme under the rule in Saunders v. Vautier.

The Company was dissolved on or about 19 September 2000.

On 26 July 2001, the Appellant made a return for the year 1999/2000, in which he declared his income, save for the payment of £12,000 that the Respondents contend ought to have been included because it was made out of the Scheme on 30 December 1999. Similarly, on or before 31 January 2002, the Appellant made a return for the year 2000/2001, in which he declared his income, save for the payment of £60,499.19 that the Respondents contend ought to have been included because it was made out of the Scheme on 21 July 2000.

On 22 August 2002, the Inland Revenue wrote to the Appellant in his capacity as administrator of the Scheme, informing him that an assessment would be issued under section 591C ICTA on the basis that approval of the Scheme had ceased automatically under section 591B(2) ICTA as there had been an alteration to the Scheme that had not been approved by the Inland Revenue. The following day, an assessment was issued against the Appellant under section 591 ICTA, charging him to tax under Case VI of Schedule D at the rate of 40 per cent. on the sum of £240,000.

By a letter dated 30 October 2002, the Inland Revenue informed the Appellant that he was chargeable to tax under Schedule E in relation to a payment made to him on 4 December 1998 (later discovered to be 2 December 1998). The assessment was to be issued on the estimated sum of £240,000. The assessment was issued on 28 November 2002 under section 600 ICTA.

On 30 July 2004, Mr Martyn Rounding, an officer of the Inland Revenue, wrote to the Appellant (in his capacity as administrator of the Scheme) and informed him of his opinion that the facts concerning the Scheme ceases to warrant its continuing approval from 2 December 1998 and that, therefore, he was giving notice under section 591B(1) ICTA that approval was withdrawn. He also notified the Appellant that an assessment would be issued under section 591C ICTA in due course.

On 22 September 2004, as assessment was issued under section 591C ICTA, charging tax under Case VI of Schedule D at the rate of 40 per cent. on the sum of £240,000. This assessment was issued on the alternative basis that approval had not already automatically ceased. On 5 October 2004, assessments were issued under section 596A ICTA, charging tax under Schedule E on the sum of £200,000 in relation to 1998/1999, the sum of £12,000 in relation to 1999/2000 and the sum of £60,499 in relation to 2000/2001. These assessments were issued on the alternative basis that the Appellant had received payments from a non-approved, as opposed to an approved, retirement benefits scheme.

THE LEGISLATION AND THE ROLE OF THE PENSIONEER TRUSTEE

The legislative framework relevant to this appeal was originally to be found in Chapter II of Part II of FA 1970. These provisions were repealed by section 844(4) and Schedule 31 ICTA and re-enacted in Chapter I of Part XIV ICTA. Subject to transitional provisions and savings, the provisions in ICTA have since been repealed with effect from 6 April 2006.

An exempt approved pension scheme enjoyed exemption from income tax on income derived from investments and deposits: section 21(2) FA 1970, section 592(2) ICTA. Furthermore, sums paid by an employer by way of contributions to such a scheme were allowable as a deductible expense: section 21(3) FA 1970, section 592(4) ICTA.

The conditions for approval of retirement benefit schemes were set out in section 590 ICTA. Where those conditions were satisfied, the Board of Inland Revenue was required to grant approval. In addition, by section 591 ICTA, the Board was given a discretion to approve (subject to such conditions, if any, as it thought proper to attach) certain other schemes that did not satisfy the requirements prescribed by section 590. No such discretionary approval could be given if to do so would be inconsistent with regulations made by the Board: section 590(5) ICTA.

In the case of small self-administered schemes, such regulations restricted the Board's discretion to approve a scheme unless its governing documentation contained provisions requiring one of the trustees to be a pensioneer trustee. A pensioneer trustee is described in the Practice Notes on Occupational Pension Schemes, IR 12 (1997), issued by the Pension Schemes Office, as an individual or body recognised by the Revenue as being widely involved with occupational pension schemes and having dealings with the Pension Schemes Office, who has given an undertaking to that Office that he or she will not consent to any termination of a scheme of which he or she is a trustee otherwise than in accordance with the approved terms of the winding-up rule.

Section 591B ICTA, which made provision for the cessation of approval, was in the following terms:

(1) If in the opinion of the Board the facts concerning any approved scheme or its administration cease to warrant the continuation of their approval of the scheme, they may at any time by notice to the administrator, withdraw their approval on such grounds, and from such date (which shall not be earlier than the date when those facts first ceased to warrant the continuance of their approval or 17th March 1987, whichever is the later), as may be specified in the notice.

(2) Where an alteration has been made in a retirement benefits scheme, no approval given by the Board as regards the scheme before the alteration shall apply after the date of the alteration unless—

(a) the alteration has been approved by the Board, or

(b) the scheme is of a class specified in regulations made by the Board for the purposes of this paragraph and the alteration is of a description so specified in relation to schemes of that class.

Section 591C ICTA made provision for a charge to tax upon cessation of approval. Subsection (1) provided (at the relevant time) as follows:

Where an approval of a scheme to which this section applies ceases to have effect otherwise than by virtue of paragraph 3(2)(a) of Schedule 23ZA, tax shall be charged in accordance with this section

Subsection (2) provided that tax should be charged under Case VI of Schedule D at the rate of 40 per cent. on an amount equal to the value of the assets which immediately before the date of the cessation of the approval of the scheme are held for the purposes of the scheme (taking that value as it stands immediately before that date). Subject to section 591D(4), the person liable for the tax was the administrator of the scheme: section 591C(3). Subsection (4) of section 591C then provided (at the relevant time) that:

This section applies to a retirement benefits scheme in respect of which one or more of the conditions set out below is satisfied.

Subsection (5) then provided that:

The first condition is satisfied in respect of a scheme if, immediately before the date of the cessation of the approval of the scheme, the number of individuals who are members of the scheme is less than twelve.

It is common ground that the Appellant was, at the material time, the only member of the Scheme. In the circumstances, therefore, it is not necessary to consider the second or third conditions. It is also common ground that Schedule 23ZA (to which reference is made in section 591C(1) ICTA) is not relevant.

By section 596A ICTA, where a person received a benefit provided under a retirement benefit scheme which is not of a description mentioned in section 596(1)(a), (b) or (c) – in essence, a benefit provided under a non-approved scheme – tax was charged in accordance with the provisions of section 596A: see subsection (1). Where the benefit was received by an individual, he was charged to tax under Schedule E for that year: section 596A(2) ICTA.

Section 600 ICTA applied to any payment to or for the benefit of an employee otherwise than in course of payment of a pension, being a payment made out of funds that were held for the purposes of an approved scheme. Subsection (2) of that section (insofar as is relevant) provided that:

If the payment is not expressly authorised by the rules of the scheme…the employee…shall be chargeable to tax on the amount of the payment under Schedule E for the year of assessment in which the payment is made.

THE ISSUES

There was no agreed statement of issues.

Counsel for the Appellant raised the following issues for determination.

(1) Was the Appellant entitled to rely on the rule in Saunders v. Vautier and treat the assets formerly held under the supplemental trust deed dated 1 January 1994 as his own absolute property?

(2) If the Appellant was justified in relying on the rule in Saunders v. Vautier and approval of the Scheme lapsed (either because it was withdrawn or automatically) were the assets held for the purposes of the Scheme immediately before cessation of approval and therefore within section 591C ICTA?

(3) Did approval of the Scheme lapse (either because it was withdrawn or automatically)?

(4) Do the Special Commissioners have jurisdiction to review the purported withdrawal of approval under section 591B(1) ICTA?

(5) Was the purported withdrawal authorised by the Board and/or a lawful exercise of discretion?

(6) Were there any facts justifying the withdrawal of approval?

(7) Were the officers raising the assessments (and the officers withdrawing approval) properly authorised to do so?

(8) Were the section 591C ICTA assessments or any of them justified in law?

(9) Could the Revenue also raise assessments under section 596A ICTA?

(10) If so, were the payments to the Appellant made from an unapproved scheme?

(11) If approval of the Scheme remained on foot, were the payments to the Appellant made out of funds held for the purposes of the Scheme and therefore within section 600 ICTA?

(12) If they were, were the payments made otherwise than in accordance with the Scheme rules?

(13) Was it open to the Revenue to raise assessments under Schedule D and Schedule E?

(14) Was it open to the Revenue to raise alternative assessments?

(15) Are the assessments correct in amount?

In her skeleton argument, counsel for the Respondents formulated the issues for determination in the following terms.

(1) Does the rule in Saunders v. Vautier entitle the Appellant to wind up the trusts of the Scheme and have the funds transferred to him absolutely?

(2) Do the Special Commissioners have any jurisdiction to review the Revenue's decision to withdraw approval of the Scheme under section 591B(1) ICTA?

(3) Is the Appellant, as administrator of the Scheme, liable for tax under section 591C ICTA?

(4) If so, what was the value of the assets of the Scheme on the day before approval ceased?

(5) Did the Appellant receive payments from an unapproved scheme and, hence, is he liable to tax under section 596A ICTA?

(6) If, contrary to the primary case advanced by the Respondents, the Appellant received payments from an approved scheme otherwise in the course of payment of a pension, is he liable to tax under section 600 ICTA in respect of such payment?

THE EVIDENCE

The Respondents did not rely on the evidence of any witnesses of fact. The Appellant relied on a witness statement made by him on 15 November 2007.

The Appellant also gave oral evidence. He said (and I accept) that he strongly and genuinely believed that the rule in Saunders v. Vautier applied, with the result that he believed that he was absolutely entitled to the trust property and entitled to call for the same from the trustees.

It was accepted by the Appellant that the possibility existed that he might re-marry or that he might have dependants within the meaning of the rules of the Scheme. It was also accepted that between the time of his giving notice to the trustees of his intention to terminate the trusts of the Scheme under the rule in Saunders v. Vautier and his giving notice to the Pensioneer Trustee of its removal from office and the time at which the funds were withdrawn from the Chesham Building Society, the Appellant took no other steps in or towards the winding up of the trusts of the Scheme.

THE RULE IN SAUNDERS V. VAUTIER

The Appellant's Contentions

The Appellant contended that in November 1998 he was entitled to rely upon the rule in Saunders v. Vautier and to treat the assets formerly held upon the trusts of the Scheme (as set out in the supplemental trust deed dated 1 January 1994) as his own absolute property.

Rule 4 of the rules of the Scheme dated 1 January 1994 state that Scheme shall provide any or all of the following benefits:

(i) In the event of the death of the member whilst in the employ of the Employer, a lump sum;

(ii) a pension payable to the member;

(iii) a pension payable to a widow and/or Dependent in the event of the member's death after the relevant date [i.e. the earlier of the dates of retirement or of the death of the member], and

(iv) a pension payable to the widow and/or dependant of the member in the event of his death whilst in the employ of the employer.

In 1998, the Appellant was still an employee of the Company. He had been the sole member of the Scheme since the death of Mrs Thorpe. He had not re-married and did not have any dependants. In his witness statement, the Appellant said (and I accept) that on 9 September 1998 the Pensioneer Trustee advised him that his final salary for pension purposes would be £37,944 p.a., which would entitle him to a maximum, index-linked pension of £25,296. He was further advised that if the fund were valued at £250,000, it would support the payment of an index-linked pension of £21,690 p.a. or a lump sum of £42,802 plus a reduced pension of £17,450 p.a. At that time, the pension fund comprised the sum of £255,000-odd held in the account at Chesham Building Society. The Appellant therefore concluded that if he took the pension, or the lump sum and the reduced pension, the fund would be exhausted. On this basis, the Appellant contended that there was no possibility that the trustees could appoint an interest to a future widow that he might have or to any dependants that he might have.

In the circumstances, the Appellant contended that he was the sole beneficiary of the trusts of the Scheme, that his entitlement was vested as to interest and quantum, and that, accordingly, he was entitled to bring the Scheme to an end under the rule in Saunders v. Vautier.

The Respondents' Contentions

The Respondents contended that the rule in Saunders v. Vautier applies only where beneficiaries are sui juris and are together entitled to the whole beneficial interest in the trust property. The rule does not apply if other persons have possible or contingent interests in the trust property. Although it was accepted by the Respondents that the Appellant may have been the only member of the Scheme in existence at the relevant time, it was contended that he was not the only possible beneficiary. The Respondents pointed to rule 4 (which provides for a pension payable to a widow or dependent upon the member's death following retirement) and rule 6 (which allows for payment to the widow of a member, the dependants of a member or the children or grandchildren of a member upon that member's death in service). In the light of these provisions, it was submitted that there were other potential beneficiaries of the trust property in December 1998.

It was also contended that the fact that it is unlikely that there will or might be further beneficiaries does not detract from the proposition that potential beneficiaries must be protected. In this regard, I was directed to Re Whichelow [1953] All ER 1558 and Re Steed Will Trust [1960] Ch 407. The Respondents submitted that whilst there remained the possibility that other potential beneficiaries might come into existence, the rule in Saunders v. Vautier could not apply and, accordingly, the Appellant was not entitled to wind up the Scheme or to call for the trust property.

Decision on Saunders v. Vautier

The rule in Saunders v. Vautier is set out in the thirty-first edition of Snell's Equity (London, 2005) at paragraph 27-25 in the following terms (emphasis added):

Although the beneficiaries cannot, in general, control the trustees while the trust remains in being, or commit them to particular dealings with the trust property, they can, if sui juris and together entitled to the whole beneficial interest, put an end to the trust and direct the trustees to hand over the trust property as they direct; and this is so even if the trust deed contains express provisions for the determination of the trust.

I agree with the contentions made on behalf of the Respondents that it is fundamental to the application of the rule that the beneficiaries must be together entitled to the whole of the beneficial interest. In my judgement, it is clear that the rule can have no application where there are potential beneficiaries not yet in existence, however remote their interests might be or however unlikely it might be that those beneficiaries should come into existence.