In Morgan Lloyd Trustees Limited & Others v HMRC  TC08779, seven companies were hit with pensions unauthorised payment charges and their financial adviser was fined when a scheme to release employers' pension funds as loans back to the companies secured on their overvalued intellectual property backfired.
The companies (the Employers) all required loan finance, all the usual sources of funding having been used up.
Morgan Lloyd Trustees (MLT), their financial adviser, advised that they could borrow funds from their self-administered pension schemes.
There are strict rules to prevent the unauthorised payment of pension funds.
The advisers created loan-back arrangements, which centred on the existence of saleable intellectual property (IP) in the Employers.
Assets or funds were transferred from the pension schemes to the Employers via pension funding deals as follows
- Pension funds made loans back to the Employers secured by a charge over intellectual property assets owned by the Employers.
- Sale and leaseback arrangements involved a sale from the Employers to the pension fund of intellectual property assets and their lease back to the Employers.
- Sale and licence back arrangements involved a sale from the Employers to the pension fund of intellectual property assets and their licence back to the Employers on an 'interest only' basis.
HMRC enquired into the Employers and MLT and considered that these funding arrangements lacked substance: there was no value in the IP.
HMRC issued assessments for Pensions Unauthorised Payment Charges and a scheme sanctions charge for the financial adviser.
The Employers and MLT appealed to the First Tier Tribunal (FTT), which then was given the task of evaluating the merits of the IP assets included in the deals which were:
- A registered trade mark.
- An unregistered trade mark, database website and domain name.
- An unregistered trademark.
The FTT found some considerable issues:
- The Employers were desperate for funding: they paid scant attention to the details of the funding deals.
- The lack of scrutiny over the transactions meant that, in some cases, they were not even clear about what IP was the subject of the pension funding.
- There was even some debate even amongst experts as to whether a website was the same as a domain.
- In one case a company's 'trademark' consisted of a headshot of the director and a strapline, with no reference to the company's name at all, and was said to be worth £5,400. A 'database' comprising of a director's own client list was said to be worth £5,000 and a website and domain name were said to be worth £1,200.
- In another, MLT was prepared to sign off multiple pension funding deals with the same Employer, resulting in nearly 100% of that Employer’s pension fund being leveraged.
The tribunal was unimpressed by the lack of commercial reality over the IP valuation exercises which were undertaken, both by the valuation experts who were employed at the time and the expert who gave evidence to the tribunal:
- Neither they nor the Employers seem to have stood back and considered realistically what the assets in question should be worth, preferring to apply accepted approaches and methodologies which assumed that a real market existed without asking whether the results were realistic.
- None of the experts nor the Employers critically questioned the profit forecasts for the companies on which the valuations relied. Those profit forecasts were just accepted, despite the fact that in many cases there were based on optimistic assumptions.
The tribunal decided that the IP assets were overvalued and the resultant release of pension funds back to Employers in return for overvalued IP were unauthorised payments from the pensions. It upheld HMRC's assessments.
Finding that MLT’s overall attitude to the details of all of the Pension Funding Deals was 'cavalier', and that there was an overall lack of due diligence by the firm, it would be just and reasonable for MLT to be liable to the scheme sanction charge.
The decision is another in a series of co-joined appeals against unauthorised payment charges arising from the Clifton Consulting Limited case.
Useful guides on this topic
Pensions: Unauthorised payment charges
What is a pension unauthorised payment? When does a tax charge arise? Who pays the charge?
Pensions: Tax rules and planning
What tax rules apply to pensions? What tax relief is available? What tax charges can arise? What planning opportunities are there?
Pensions: Tax charge for excess contributions
When does a tax charge arise for excess pension contributions? What are taxpayers' responsibilities under Self Assessment?
Pension contributions: Personal or company?
Is it more tax efficient to pay pension contributions personally or via your own company?