In Willey v HMRC a scheme administrator made an unsuccessful challenge against a scheme sanction charge relating to an unauthorised employer payment. It is a reminder of the importance of having systems in place to monitor payments made from a scheme – particularly where the scheme administrator does not have a hands on role.

Mr W was the scheme administrator for Finance Act 2004 purposes but not a trustee (this is fairly unusual as standard practice is for the trustee to also be the "administrator" for legislative purposes). The trustees made a loan to one of the employers without Mr W's knowledge. There was no dispute that this was an unauthorised payment. The employer paid the 40 per cent unauthorised payment tax charge, leaving a 15 per cent scheme sanction charge to be paid by the scheme administrator (as provided for in the Finance Act 2004).

Click here for the judgment of the First-Tier Tribunal.

Mr W argued that he should not be liable for the charge on a number of grounds including the following:

  • The loan was made shortly after A Day and he was unfamiliar with the new regime.
  • He was not made aware of the loan by the trustees, had he been, he would have advised against it.
  • As soon as he was aware of it, he took steps to assist the trustees in reversing the position.
  • The loan has been repaid with interest so there was no loss to the scheme.
  • The scheme sanction charge is a penalty – in the circumstances it is unreasonable and unjust.

The Finance Act 2004 provides relief from a scheme sanction charge where:

  • the scheme administrator reasonably believed that the unauthorised payment was not a scheme chargeable payment; and
  • in all the circumstances of the case, it would not be just and reasonable for the scheme administrator to be liable to the scheme sanction charge in respect of the unauthorised payment.

The tribunal found that Mr W should be liable to meet the tax penalty in this case because of his total failure to have systems in place to indentify unauthorised payments. The fact that the loan was repaid in full was irrelevant.

Mr W also argued that the scheme sanction charge was a breach of the European Convention on Human Rights (in particular, the right to enjoyment of possessions). Previous case law on this point confirmed that a tax penalty must not be "disproportionate having regard to the aim it is seeking to implement". The tribunal found that there had been no breach.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.