The history of the Hymanson case is short and sweet.
In a nutshell, having claimed Fixed Protection (FP) for his lifetime allowance, Mr H continued pension contributions to his other pension arrangements in an apparent breach of the FP rules. As a result, HMRC withdrew Mr H's FP certificate leading to him appealing to the First Tier Tax Tribunal (FTT). In its November 2018 decision the FTT restored Mr H's Fixed Protection and accepted the argument of Mr Michael Firth (Mr H's Counsel) that Mr H had made a mistake in paying the contributions and accordingly the contributions were paid in error and should therefore be disregarded. Mr H was in no doubt about the legal nature of the transaction – he knew he was paying further contributions – his mistake was as to the tax effect of the transaction.
In technical terms, due to Mr H's mistake he was entitled to rescind the contract under which the contributions were paid. This safeguarded Mr H's FP.
Why did HMRC withdraw its appeal?
HMRC's appeal to the Upper Tax Tribunal was due to be heard in July 2019. However, in June 2019 HMRC withdrew its appeal. HMRC in the end had to accept the FTT's reasoning, confirmed by the High Court following an application made by Mr H's Counsel.
FTT reasoning in more detail
Rescission – in general terms, the cancellation (rescission) of a contract is a legal remedy where there has been a mistake in entering into a contract. The legal conditions for rescission, and rectification, were explained by the Supreme Court in Pitt v Holt in 2015.
The court made it clear that a mistake as to the tax consequences of a transaction can suffice for rescission. The mistake must rest on more than total ignorance; it can on a close examination of the particular facts be due to the taxpayer's conscious belief or tacit assumption (here that the continued payment of contributions would not cause tax problems). The mistake must be basic to the transaction and must be a mistake which has grave consequences for the taxpayer unless the contract is rescinded.
The FTT, having considered the decision in Pitt v Holt and the particular circumstances of Mr H's case, decided that Mr H's mistake met these tests. For instance, his contributions of some £7,000 would result in Mr H receiving a tax bill estimated at £50,000 unless the contract was rescinded.
Jurisdiction – remedies such as rescission and rectification are usually granted only by the Administrative Court namely the High Court. However, the FTT was satisfied that if Mr H had gone to the High Court (an expensive option) he would have been granted rescission.
The FTT adopted the statement of the Judge in the previous Upper Tribunal case of 'Lobler' in March 2015 that, although the FTT cannot itself order rectification it could decide that, if rectification would be granted by a Court which does have jurisdiction to grant it the "tax position would follow as if such rectification had been granted". In other words, in fairness one should treat as done what could have been done. The FTT in Hymanson applied the same principle to Mr H's case.
The FTT acknowledged that it had only a supervisory role in relation to HMRC. Therefore, the FTT could only find against HMRC and direct HMRC to restore Fixed Protection if, for example, HMRC failed to take into account relevant factors. The FTT decided that HMRC's failure to consider Mr H's own mistake as a ground for rescinding the contract was a very relevant factor which HMRC had overlooked, and therefore HMRC's decision was incorrect.
Application to the High Court
As belt and braces ahead of the Upper Tribunal hearing Mr H's Counsel applied to the High Court for an Order for the contract to be rescinded. The High Court agreed to deal with the matter on the papers without requiring a hearing and made the Order sought. Following this HMRC withdrew its appeal to the Upper Tribunal.
What are HMRC likely to argue in subsequent cases?
Statistics show that protection from the lifetime allowance charge has been withdrawn by HMRC in many cases e.g. due to the member paying subsequent contributions, or for other reasons. Whilst each case depends on its own facts numerous taxpayers may now wish to consider challenging HMRC, basing themselves on the law of 'mistake' applied in 'Hymanson'. So next time round HMRC are likely to bring the heaviest guns to bear.
HMRC's main problem in Hymanson was that the issue of FTT's jurisdiction and the merits of the case were rolled into one. In a subsequent case, HMRC may well argue that, first and foremost, the case should be heard in person (not just on the papers) in the High Court (an expensive option) and not in the FTT. The difficulty for HMRC is that in the 'Lobler' decision the Upper Tribunal ruled the FTT in effect has jurisdiction (being able to treat that as done which should in fairness be treated as done). The FTT being a lower ranked Tribunal than the Upper Tribunal is bound to follow the Upper Tribunal on this point. So HMRC needs some way to persuade the High Court to direct that only the High Court has jurisdiction. If HMRC succeed in this, the cost of full High Court proceedings would be a significant deterrent for many taxpayers.
As well as the law of rescission, it is clear that procedural arbitrage between the Tribunals and the Courts is a key element and on this expert legal advice is essential.
Going forward, what is the status of HMRC's guidance on genuine errors in the pensions context?
Answer: HMRC's guidance would seem holed beneath the water. The Pensions Tax Manual refers to third party administration errors such as where a member instructs a bank to stop paying contributions by standing order from the member's bank account but the bank overlooks the instruction and continues the contributions. But makes little mention of member's own errors in the context of the law of mistake. The HMRC guidance needs updating to reflect the developing case law on 'mistake' flowing from key decisions such as Pitt v Holt in the Supreme Court, Lobler in the Upper Tribunal and now Hymanson in the FTT.
Guest comment: Why HMRC withdrew its Hymanson appeal