Thorpe v HM Revenue & Customs

The rule in Saunders v Vautier cannot be used where potential beneficiaries may still acquire an interest under a pension trust. An unauthorised transfer made in breach of trust may nevertheless fail to constitute a taxable payment or benefit under sections 596A and 600 of the Income and Corporation Taxes Act 1988 where the recipient remains accountable as trustee and is able and willing to return the fund. Tax applies to funds that cannot be restored. A Court of Appeal ruling on an issue expressly left undecided by the final appellate court in the same litigation is persuasive but not binding. A cessation-of-approval charge under section 591C is distinct from income tax on benefits received under section 596A.

Harry Thorpe appealed against assessments raised by HM Revenue and Customs following his withdrawal of funds from an approved small self-administered pension scheme. The Special Commissioner dismissed his appeals. Mr Thorpe argued that he was absolutely entitled to the fund under Saunders v Vautier, that the transaction could be reversed under Re Hastings-Bass, and that the resulting charges involved double taxation.

The High Court considered whether the withdrawals were authorised, whether the fund remained subject to the trusts despite the transfers, whether sections 596A and 600 of the Income and Corporation Taxes Act 1988 applied, and whether the assessments under section 591C were sustainable.

1. Rule in Saunders v Vautier. The rule requires all beneficiaries to be sui juris and together entitled to the whole beneficial interest. That requirement was not met because the scheme allowed for possible future dependants or a widow. Mr Thorpe therefore could not require the trustees to transfer the fund to him, and the withdrawals were unauthorised.
2. Re Hastings-Bass. The principle applies to an improper exercise of a discretion by trustees. It did not apply to Mr Thorpe’s conduct. He acted as a trustee in directing the transfer, but not under a discretion conferred on the scheme trustees. He committed a breach of trust and received the money with notice of that breach. The fund therefore remained subject to the trusts and he held it as constructive trustee.
3. Meaning of payment and benefit. The court followed the approach of Lawrence Collins J in Venables & ors v Hornby. Where an unauthorised payment is made in breach of trust, the recipient is accountable to the trustees as actual or constructive trustee, and is able and prepared to account for it, there is no effective taxable payment or benefit for sections 596A and 600. The recipient is taxable on funds that cannot be returned. The Court of Appeal reasoning in Venables & ors v Hornby was persuasive but not binding because the House of Lords had expressly left the section 600 issue undecided.
4. Section 591C. The charge under section 591C was imposed on Mr Thorpe as scheme administrator in order to recover the tax privileges previously enjoyed by the fund. It was not an assessment on his income. The assessment was therefore not shown to involve double taxation, and any challenge to withdrawal of approval lay by judicial review rather than appeal to the Special Commissioners.
5. Disposition. The appeals concerning section 591C were dismissed. The appeals under section 596A were allowed and the assessments discharged, subject to the court being satisfied that the fund, including the pensioneer trustee’s control, had been restored.

1. Special Commissioner. The Special Commissioner dismissed Mr Thorpe’s appeals against the assessments on 19 May 2008.
2. High Court (Chancery Division). The court dismissed the appeals concerning section 591C and allowed the appeals concerning section 596A, subject to restoration of the fund.