Morgan Lloyd Trustees Limited v The Commissioners for HMRC

Contractual interpretation is objective. The court must ascertain what a reasonable person, equipped with the background reasonably available to the parties, would understand the language to mean. It may test competing readings against commercial consequences, but it must not rewrite an imprudent bargain where the language remains clear.

A challenge to findings of fact or a multi-factorial evaluative judgment succeeds only for legal error, such as absence of evidence, irrationality, misdirection, or a conclusion outside the permissible range. For relief from a scheme sanction charge under Finance Act 2004, section 268(7), a professional scheme administrator must show both an objectively reasonable belief and that discharge would be just and reasonable. Reliance on valuers does not remove the need for commercially critical scrutiny.

Morgan Lloyd Trustees Limited, trustee and scheme administrator of numerous small self-administered pension schemes, appealed from the First-tier Tribunal’s dismissal of challenges to scheme sanction charges and refusals to discharge them. The charges followed pension-funding transactions under which sponsoring employers transferred intellectual-property assets to their schemes, or borrowed against such assets.

The First-tier Tribunal’s decision, [2023] UKFTT 355 (TC), held that the transactions produced unauthorised employer payments and that the administrator was not entitled to discharge under section 268. The appeal concerned contractual construction, challenges to factual and evaluative findings, the deadline for discharge applications, and the section 268(7) tests.

1. Appeal allowed in part. The Upper Tribunal allowed the appeal concerning the Langford and Fraser loans and remitted those issues to the First-tier Tribunal. It dismissed the appeal in all other respects.

2. The First-tier Tribunal had erred in treating contractual “commercial context” as what was actually in both parties’ minds. Construction is objective, using the background knowledge reasonably available to the parties. That error did not alter the Formwise result. The agreement identified only a domain name; although that produced an unattractive outcome, the Tribunal would not rewrite the parties’ bargain.

3. The Langford and Fraser security documents were materially different. Their defined intellectual property included associated goodwill. On their proper construction, the security comprised the domain name and goodwill generated through its use. The First-tier Tribunal’s contrary construction was erroneous. The valuation and adequacy of the security required reconsideration.

4. The Upper Tribunal upheld the findings on Ballards and Gannon. The challenges were attempts to revisit factual findings and evaluative judgments that were supported by evidence and open to the First-tier Tribunal.

5. An application under section 268 is to discharge the underlying liability, not cancel an assessment. Under the discharge regulations, the ordinary six-year period runs from the end of the accounting period in which that liability arose. The First-tier Tribunal was also entitled to find that the relevant applications had not been sent to HMRC before December 2018.

6. For section 268(7), reasonable belief is assessed objectively in the circumstances of the particular administrator. A professional trustee must appoint suitably qualified valuers and apply critical commercial scrutiny to valuations, asset identity, documentation and transaction risks. MLT did not satisfy that standard. Nor was discharge just and reasonable, given its passive and commercially uncritical administration of highly leveraged transactions.

• Upper Tribunal (Tax and Chancery Chamber): allowed MLT’s appeal in relation to Langford and Fraser and remitted those matters; otherwise confirmed the First-tier Tribunal’s decision.
• First-tier Tribunal: dismissed the employers’ and MLT’s appeals in [2023] UKFTT 355 (TC).