SPC00573

INCOME TAX  -  Relief available for AVCs  paid by an employee -  Contributions covering the intended contributions for more than 2 ½ years paid late because of administrative errors on the part of the employer and the pension provider  -  whether the contributions in excess of 15% of the taxpayer’s salary in the year of payment were deductible  -  Appeal dismissed  

THE SPECIAL COMMISSIONERS

	COL. IAN G NASON	Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Special Commissioner: HOWARD M NOWLAN

Sitting in public in London on 22 May 2006

The Appellant in person

Tony Mear for the Respondents

© CROWN COPYRIGHT 2006

DECISION

INTRODUCTION

1.    This was a simple but rather unfortunate case.  The decision that I had to reach on the facts seemed to me to be a rather unfair one, and those representing HM Revenue & Customs (“HMRC”) appeared not to disagree with this view. Whilst I will thus record the facts and my decision, I do hope that those with the delegated power to exercise a particular discretion vested in the Board of HMRC will be able to exercise that power so as to achieve a more just and sensible result.

THE FACTS

2.   Col. Nason, an employee of the Ministry of Defence, had regularly paid Additional Voluntary Contributions (“AVCs”) into an approved statutory pension scheme. These contributions had been paid automatically by his employer on his behalf by way of deduction from his salary, and had been paid in the amount of  £320 monthly. Until December 2000, the AVCs had been paid to Equitable Life, and since the contributions had been within the limit of 15% of his salary, all the contributions had been deductible from his income for tax purposes.  

3.    In December 2000, the Ministry of Defence informed Col. Nason that in the light of the financial difficulties being experienced by Equitable Life, it would be prudent to consider switching both his existing fund of AVCs and future contributions to a different pension provider. The Ministry of Defence suggested that he might choose either of Scottish Widows or Standard Life, and as he already had an investment with Scottish Widows, he chose Standard Life. 

4.    Some confusion obviously arose either on the part of the Ministry of Defence or Standard Life because whilst the Ministry suggested that Standard Life was an appropriate company to take both Col. Nason’s existing fund and his future contributions, Standard Life had in some way to be designated as an approved provider by the Ministry before they would be able to set up an appropriate scheme to take civil service AVCs, and this approval had not been granted when Col. Nason’s existing fund was transferred to Standard Life. By this stage, Col. Nason had filled in various forms that he had been sent and asked to complete by Standard Life, but these were apparently the wrong forms. Having however filled in the forms, £15,307 was transferred by Equitable Life to Standard Life, and invested in some form of pension fund that was in some way inappropriate. During this period of confusion no AVCs were being paid, perhaps because it was by then appreciated that Standard Life had not been designated as an appropriate pension provider to take civil service AVCs. 

5.    It apparently took until January 2002 for Standard Life to be given the appropriate approval or designation to take civil service AVCs. Col. Nason’s position, and the fact that his existing fund was invested in some wrong form of pension fund was not sorted out until September 2002.  Col. Nason had had to visit Standard Life in Edinburgh to sort matters out, and to make the arrangements for his existing fund to be transferred into the correct Standard Life pension fund, and to make the arrangements for his AVCs, due ever since Janauary 2001, to be paid into the newly designated Standard Life fund. 

6.    In September 2002, Col. Nason gave Standard Life two cheques, respectively for £2,601.67 and £5,346.84. The first of these represented the AVCs of £320 a month that Col. Nason had wished to pay from January 2002 (the date when the Standard Life scheme was approved or designated) until the last date before the due date for the payment of his September 2002 AVC, in other words approximately 8 payments of £320. The amount paid by the second cheque was calculated in a rather complicated way. Equitable Life was asked what Col. Nason’s fund would have been worth with Equitable Life if it had been left invested in Equitable Life until January 2002, and if additionally Col. Nason had continued to make the monthly payments from January 2001 until the notional date of transfer in January 2002. The figure given by Equitable Life was £19,646.84. There was then calculated the amount by which this figure exceeded the value of the fund that had actually been held by Standard Life in the wrong account since January 2001, and it emerged that because the investments representing the £15,307 originally transferred by Equitable Life had fallen in value, it would cost Col Nason £5,346.84 to restore the value of the fund actually transferred  to the value quoted by Equitable Life. It follows from this slightly complicated calculation that Col. Nason’s larger payment was essentially doing two things. It was making the £320 monthly contributions for the period from January 2001 until January £2002, and additionally it was restoring the value of the Standard Life fund to the higher value that it would have had had the transfer been made on approximately the date that the Standard Life fund secured its appropriate approval. 

7.    From September 2002 until the date of his delayed retirement in about April 2003, Col. Nason resumed monthly payments of the £320 into the Standard Life fund. 

THE STATUTORY PROVISIONS GOVERNING DEDUCTIONS FOR AVCs. 

8.    Section 594 Taxes Act 1988 is the provision that grants employees tax relief for AVCs paid under relevant statutory schemes established under a public general Act.    It provides that “the amount allowed to be deducted in respect of contributions paid by a person in a year of assessments shall not exceed 15 per cent, or such higher percentage as the Board may in a particular case prescribe, of his remuneration for that year”. It is unfortunately the case that there is no provision that enables employees to carry back excess contributions that they make in one tax year to the preceding tax year or earlier tax years if they have not made contributions in those earlier years.

THE DECISION

9.    It is clear in this case that Col. Nason has not been seeking to do anything other than make conventional AVC payments that would not have exceeded his 15% of salary limit in any year, apart from the element of his larger cheque to Standard Life that was designed to restore the value of the Standard Life fund to what it would have been worth, had it remained invested with Equitable Life. It is only because of administrative errors on the part of the Ministry of Defence or Standard Life (more likely it seems the former than the latter) that Col. Nason has been involved in a two year battle first to clarify and regularise his proper pension position, and latterly (for a further three to four years) to clarify the tax treatment of the contributions that he has made. 

10.    The regrettable feature that was quite correctly asserted by HMRC, and could barely be disputed by Col. Nason was that he had in fact only paid the various amounts that he did pay into the Standard Life Scheme in and after September 2002.    This was so, notwithstanding that in his mind (and in reality) the payments clearly represented back dated contributions that he would have paid month by month, but for wrong advice given to him by the Ministry of Defence in December 2000, and but for the general confusion between the Ministry and Standard Life. It is absolutely clear that Col. Nason was in no way to blame for that confusion. 

11.    In view of the fact that the payments were in fact all made in September 2002, and that section 594 contains no form of “carry back” provision, in the way that several other pension relief provisions do, and that the total payments made in the year from April 2002 to April 2003 do exceed 15% of Col. Nason’s salary for the relevant year, the Inspector dealing with this case had no option but to refuse the claim for further tax relief. In my turn, I cannot conclude that the payments were actually made in the earlier years, or that the relieving provision contains any form of ability to carry back contributions, and so I must dismiss Col Nason’s appeal. I understand that Col. Nason also made contributions equal to 1 ½ % of his salary into another civil service scheme designed to take AVCs, with the result that the agreed figure of tax refund owed to Col. Nason, once I have to dismiss his appeal for the excess contributions to be deducted is £3,213.39. 

12.    I did however note that section 594 sets the limit for tax relief at “15% or such higher figure as the Board may in a particular case prescribe” of the remuneration for the year.  I was told that if I made a request that those with the delegated power to fix a higher percentage might review Col. Nason’s case, this request would be passed on to the appropriate officials. In the light of the fact that Col. Nason has not been seeking to do anything other than pay the maximum 15% AVC’s and that his inability to do this has resulted solely from problems associated with Equtable Life, and wrong advice from the Ministry of Defence that he make his contributions to Standard Life, which was not approved to take those contributions until January 2002, and his own particular circumstances were not clarified until September 2002, it would seem fair for the 15% limit to be raised to give Col. Nason tax relief for the greater part of the contributions that he actually made. I am sure that if the additional relief was measured so as to correspond exactly to 15% of Col. Nason’s salary in the tax years 2000/2001, 2001/2002 and 2002/3, so that the relief would take into account those contributions actually made to Equitable Life before December 2000, the contributions made to Standard Life monthly after September 2002 and the 1 ½% contributions made to the civil service scheme, Col. Nason would be content.  In other words, this treatment would give relief for everything apart from that portion of the cheque for £5,346.84 that simply topped up the value shortfall in the Standard Life scheme, as against the value that he would have had, had he remained in the Equitable Life scheme until January 2002. Since that element of the total payments does exceed 15% of his salary over the relevant years, it would seem reasonable for this element not to qualify for tax relief, but it still seems to me, and I suspect also to those representing HMRC at the appeal, that it would be just for tax relief to be allowed for the rest of Col. Nason’s claim.  I very much hope, on Col. Nason’s behalf, that this request can be granted to him, and should there be others in similar circumstances, to those others as well. 

HOWARD M NOWLAN
SPECIAL COMMISSIONER

RELEASED: 1 June 2006

SC 3028/2006