Tax Tribunal finds SIPP withdrawals by expatriate not taxable by the UK

In a notable victory for the taxpayer, the First-tier Tribunal (Tax Chamber) (FTT) in Trevor John Masters v HMRC allowed an appeal by a non-resident taxpayer over the taxing rights of withdrawals made from a self-invested personal pension (SIPP).

UK-Portugal treaty scope

Article 17 of the UK-Portugal Double Tax Convention (DTC) provides that pension (or similar remuneration) paid "in consideration of past employment" to a resident of Portugal shall be taxable only in Portugal (and vice versa for UK residents). Article 17 is based on the Organisation for Economic Co-operation and Development's Model Tax Convention and is therefore of wider relevance.

Factual background

In Trevor John Masters, the taxpayer had joined his employer's pension scheme in March 1983 and built up a pension entitlement up to November 2015 (at which point the scheme closed for future benefit accrual). His entitlement under the scheme had been exclusively funded by contributions from his employer and his own employee contributions and salary sacrifice. In April 2016, the cash equivalent of the taxpayer's defined benefit pension entitlement under the scheme was transferred by the employer pension scheme administrator to a SIPP. Following this, no further payments were made into the SIPP.

The taxpayer was tax resident in the UK up to and including the tax year ended 5 April 2019. In March 2019, he moved to Portugal and became non-UK tax resident for the tax year ended 5 April 2020. He was tax resident in Portugal in the calendar years 2019 and 2020 and qualified for non-habitual resident (NHR) status there, meaning that he could benefit from certain tax exemptions in respect of foreign sourced income, including foreign pension income.

The taxpayer made withdrawals from the SIPP during the tax year ended 5 April 2020. These withdrawals were not taxed in Portugal due to the taxpayer's NHR status. However, HMRC argued that the withdrawals were subject to the deduction of UK income tax at source in the sum of £1.5 million – rejecting the taxpayer's position that the payments fell within the scope of relief under the UK-Portugal DTC.

FTT decision

On appeal, the FTT had to determine whether the withdrawals were "paid in consideration of past employment" in the context of article 17. If not, the question then became whether, under article 20, the withdrawals were taxable in the UK because they were not "subject to tax" in Portugal.

In order to decide whether article 17 applied, the FTT looked at the degree of causal connection between the taxpayer's past employment and the withdrawals made from the SIPP.

The taxpayer argued that the relevant causal connection was intact, pointing in particular to the fact that his entitlement under his employer's pension scheme was funded directly by his employment, that the transfer to the SIPP was carried out by the employer's pension scheme administrator and that no further funds were added to the SIPP. HMRC argued that the causal connection had been broken, as the taxpayer's employment with the employer in question was not a condition of the SIPP and the amount had been voluntarily moved to the SIPP (which was, according to HMRC, strictly an investment product unconnected with the taxpayer's employment).

The FTT rejected HMRC's arguments, determining that payments from personal retirement schemes including SIPPs could, in principle, meet the condition of being "paid in consideration of past employment". The FTT noted that, if the amounts had been paid directly to the taxpayer, they would be clearly paid "in consideration of past employment". The mere fact that the taxpayer's contribution was transferred from the employer's pension scheme to the SIPP did not break the causal connection between the withdrawals and the taxpayer's employment.

The FTT also had regard for the fact that the taxpayer had taken over thirty years to build up his pension entitlement, and it was the sole contribution made to the SIPP. The amount had only been in the SIPP for four years prior to the first withdrawal, a significantly shorter period of time compared to the taxpayer's period of service with his employer.

The FTT therefore held that the withdrawals from the SIPP fell squarely within article 17 and, as the taxpayer was resident in Portugal when making the withdrawals, Portugal had the right to tax these withdrawals and not the UK.

Given this finding, the FTT's consideration of the article 20 issue was purely academic. For completeness the FTT did note, however, that as the withdrawals were not actually taxed in Portugal, under article 20, the UK would not have been prevented from taxing them.

Osborne Clarke comment

While cases of this nature are highly likely to be fact specific, the FTT's decision is an important victory for the taxpayer. Given that the central issue relates to questions of treaty interpretation, HMRC may seek permission to appeal this case to the Upper Tribunal. It should be noted that a number of cases regarding treaty interpretation have gone up to the higher courts in recent times (for example, Royal Bank of Canada and GE Financial Investments) and this may be the next.

This decision also confirms that pension arrangements continue to be an area of interest for HMRC. This is not the first time HMRC have sought to scrutinise SIPP arrangements in the Tribunals (see Guy Boardman v HMRC or HMRC v Sippchoice Ltd).

On a more general note, the latest figures indicate that the total cost of pensions tax relief stands at £52.1 billion. Given the size of this sum, it may be that this is an area of scrutiny for the Treasury in the upcoming Autumn Budget.