Hundreds of members of the Ark pension schemes face paying ‘punitive’ penalty tax charges after a Dalriada-led appeal against tax charges levied by HM Revenue and Customs (HMRC) was unsuccessful.
The appeal - which was heard in the First-Tier Tribunal Tax Chamber in December - centred on how six Ark pension schemes and their members should be taxed after the High Court ruled in 2011 that the payments from the schemes to individuals constituted "unauthorised payments", meaning members and the schemes themselves would be subject to tax charges.
Ark Business Consulting was a limited liability partnership which set up six pension schemes which were used to give members early access to their pension money using controversial maximising pensions value arrangements (MPVAs) structures used to allow members to make loans to members of other pension schemes in return for a reciprocal 'loan'.
Before The Pensions Regulator (TPR) investigated the schemes in 2011 and appointed Dalriada Trustees to run them, a total of just under 500 members had joined the schemes and approximately £27m had been transferred in. Of that amount, around £9m was paid out in loans and a further £7m of assets were recovered.
HMRC argued that a tax charge arose on a payment "to or in respect of" a member - saying that an MPVA loan was a payment made "in respect of" a member that would result in a ‘reciprocal' loan back from another Ark scheme. This would mean members should be taxed on the loan they had ‘made' to a member of another Ark scheme.
Dalriada Trustees argued it was never the intention of the people who set up the Ark schemes that there was so-called "member to member matching" and that the correct approach to taxing the MPVA loans was as determined in the earlier High Court proceedings - essentially in the same way as if they had received an employment related loan.
Dalriada's proposed approach would have resulted in significantly less tax than under HMRC's approach. It was the view of both HMRC and Dalriada that only one of the approaches to taxation put to the tribunal would apply to the payments.
The tribunal's decision - published this week - concluded that member to member matching was intended and therefore accepted HMRC's proposed approach that tax charges apply to payments made ‘in respect of' members - meaning members would be taxed on the amount of MPVA loan a member had made.
But the tribunal also decided that, because a member was seen to have received an unauthorised payment equivalent to the amount of MPVA loan made from their scheme to those they were matched with, it was irrelevant that that member may not have transferred in enough money to fund the MPVA loans he or she has made - a decision the tribunal acknowledged could result in "some very unfair situations" and might mean members could end up being taxed twice.
Dalriada said the decision would have "significant" tax implications for both the members personally and the schemes themselves.
In a letter to members, seen by Professional Pensions, Dalriada Trustees said: "Clearly the decision is both incredibly disappointing and frustrating for the members and Dalriada. We considered that the approach to taxation that we argued for in the tribunal was both correct and resulted in a fair and reasonable outcome for members and the schemes.
"Unfortunately, the tribunal disagreed. Dalriada and its advisers will carefully consider the full detail of the decision before deciding whether or not there are any merits in an appeal against the tribunal's decision."
It added: "Dalriada fully appreciates the impact this will have on members, having already suffered years of uncertainty in their financial affairs.
"We understand that members of the Ark schemes were not looking at ways of avoiding tax, rather they were told by the perpetrators of the Ark schemes that they could access funds in a completely legal manner and, were not made aware of the risk of substantial tax charges that would arise in doing so."
Dalriada accredited professional trustee Sean Browes said another problem stemming from the ruling was that, while members collectively were going to suffer "punitive" tax charges, how those tax charges were applied across the membership would vary on a individual by individual basis.
He said the trustee now needed to work through the information on a case by case basis with HMRC to agree what charges each member faces.
Browes said, while the tribunal's decision centred on the application of the law as it stands, even the judge recognised that, in applying the law, this could result in unfavourable and, in some cases, unfair outcomes for members.
Browes said this could leave some facing a "five-figure" tax bill. He added: "It can't be right that somebody is going to face a tax bill when they've had no benefit and they've had no payment or loan to themselves."
Dalriada said it is also seeking to claim compensation through the Fraud Compensation Fund (FCF) on behalf of members - but said there was "no guarantee" these claims would be successful and added that, even if they were, any compensation would not cover members' personal tax bills following the tax tribunal ruling.
Will members be subject to a tax charge?
Whether a member will be charged tax depends on whether MPVA loans were made in respect of the member (which would result in a so-called section 160 charge) and whether they received an MPVA loan (which would result in a so-called section 173 charge).
Dariada said that, while members can easily determine whether they received an MPVA or not, whether an MPVA loan has been made in their respect was dependent on the intentions of the operators of the Ark Schemes and which member or members they were matched with - something that was outside of the individual members' control and could result on some "unfair" results.
A section 160 charge is based on MPVA loan payments notionally made to a member (or members) of other schemes with whom a member was matched by the operators of the Ark Schemes. For the purpose of this charge, it is irrelevant whether a member received an MPVA loan.
These loans are seen as unauthorised payments and the value attributed to the individual member an unauthorised payment charge of 40% will be applied to the value, as well as an unauthorised payment surcharge of 15% if the MPVA loans made in respect of the member exceed 25% of the value of their pension fund.
A section 173 charge is triggered when a member receives an MPVA from the lending Ark scheme. The tribunal decided that, as no interest was paid annually on the MPVA, members received a benefit equal to the official rate of interest applied to the MPVA loan in each year, and that benefit was an unauthorised payment against which a charge of 40% will be applied.
The background
HM Revenue & Customs (HMRC) rules prevent savers cashing in their pensions before age 55. Accessing funds before this age - so-called pension liberation - results in tax penalty charges.
Ark believed they had found a loophole in the system involving reciprocal loans being made between the Ark schemes such that these charges were avoided.
TPR suspected the Ark schemes were being used to facilitate pension liberation and looked to use their powers to appoint a professional independent trustee to take over the running of the schemes. Following a TPR tender process, Dalriada Trustees was appointed in May 2011.
On appointment, Dalriada stopped any further transfers in to the schemes and made no further loans.
Dalriada sought Court direction as to the validity of the Ark model. In a High Court ruling in December 2011, the court found that the model did not work as investments in the form of loans was in breach of the schemes' rules. The court also found that the loans were ‘unauthorised payments' and so subject to tax.
HMRC were not party to the 2011 court proceedings and consequently levied punitive tax charges on both the members and the schemes. While the court had, in 2011, found that the loan payments should be taxed, the basis of taxation the court felt should apply would have resulted in significantly lower tax charges for members and no charges on the schemes.
As a part of its efforts to unravel all of the issues with these schemes, Dalriada appealed against the charges levied on the schemes by HMRC in the tax tribunal - believing the more favourable basis was both correct and would result in a fair outcome.
