HMRC have released Spotlight 58: 'Disguised remuneration: tax avoidance using unfunded pension arrangements'. This concerns a tax scheme aimed at company owners.
The unfunded pension arrangements used by owner-managed companies and their directors are described as follows:
- A company enters into an agreement with its director to give the director rights to receive a future Pension from the company.
- HMRC believes this pension is never likely to be paid.
- The company claims a Corporation Tax deduction equal to the asserted current value of the total future pension to be paid to the director.
- In many arrangements, the company transfers its future obligation to pay the pension to a third party: often a relative of the director or another director of the same company.
- The company agrees to pay the third party in exchange for the transfer of this obligation.
- This payment might be made directly to the third party or they may ask for the payment to be made to the director.
It’s claimed that the arrangements result in the director, or a third party closely associated with the director, receiving funds from the company with no immediate liability to Income Tax or National Insurance.
These arrangements often result in unusual outcomes. For example, a spouse agreeing to pay their partner a pension without receiving anything in return.
HMRC's position
HMRC believe these Disguised remuneration arrangements do not work, will challenge promoters and investigate the tax affairs of those using such arrangements.
- Users of such arrangements are warned that:
- The company is unlikely to be able to claim the Corporation Tax relief intended.
- Where arrangements involve the transfer of the pension obligation to a third party, additional Income Tax and National Insurance Contributions (NICs) may be due from the company and company directors on the amount due to the third party.
- Other tax charges may also arise.
- Users of these arrangements may be charged a penalty for submitting an Inaccurate tax return to HMRC.
- Returns sent after 15 November 2017 which relate to a tax period ending after that date, and beginning after 5 April 2017, will be charged a penalty because of carelessness unless Reasonable care can be demonstrated.
- Interest will be charged on any tax paid after the statutory due date.
- For arrangements entered into after 16 July 2013, HMRC will consider whether the General Anti-Abuse Rule (GAAR) may apply. The GAAR panel has considered some such schemes (see below).
- This can result in a 60% GAAR penalty for arrangements entered into after 14 September 2016.
- If you are using these or similar schemes you are strongly advised to seek professional advice, withdraw from them and settle your tax affairs.
GAAR decisions
The GAAR Panel has considered arrangements in its opinion of 11 February 2022 whereby:
- A company agreed to pay a significant pension contribution on behalf of a director at a later date.
- That obligation to pay the pension contribution was transferred to a third party (or spouse) in exchange for a cash lump sum which was offset against a liability of the director.
- This arrangement was intended to result in the director receiving company funds without an associated tax liability and the company receiving a corporate tax deduction.
The GAAR Panel concluded that neither entering into nor carrying out such arrangements was a reasonable course of action.
The GAAR Panel reviewed an employee reward arrangement involving the creation and sale of a pension obligation, with payment made to the individual assuming the obligation. Its opinion was issued on 7 August 2024:
- Arrangement details:
- Stage 1: £180,000 earmarked for an award to sole director (R), intended not to be remuneration.
- Stage 2: Company promised R a pension of £14,526 per year from age 70.
- Stage 3: Company paid company secretary £185,000 to take over the pension obligation.
- Company claimed a Corporation Tax deduction. No PAYE or NICs were paid.
- GAAR Panel opinion:
- Stages 1 and 2 were unusual but not abnormal.
- Stage 3 was contrived and abnormal.
- Transferring a pension obligation to an individual with no pension expertise was inconsistent with legislative principles and policy objectives.
- The arrangements aimed to exploit perceived shortcomings in legislation, provided a tax advantage, and were not in line with established practice or HMRC acceptance.
The GAAR Panel reviewed an employee reward arrangement where pension obligations were created and then swapped between two employees (B and C), with payments made by the company to each for assuming the other's obligation. Its opinion was issued on 24 October 2024:
- £150,000 allocated for awards to B and C not constituting remuneration.
- Awards structured as index-linked unfunded pensions (£70k for B, £80k for C).
- Each employee assumed the other's pension obligation, receiving £76k and £66k respectively.
- Company claimed a Corporation Tax deduction of £150k (later reduced to £142k).
- GAAR Panel opinion:
- The arrangements were inconsistent with legislative principles linking tax deductions to taxable income timing.
- Steps were contrived and abnormal: individuals assuming long-term pension liabilities is highly unusual and economically risky.
- The arrangements aimed to exploit perceived shortcomings in Part 7A ITEPA 2003 by accelerating Corporation Tax deductions ahead of taxable income, and were not considered a reasonable course of action.
Useful guides on this topic
Pension contributions: Personal or company?
Is it more tax efficient to pay pension contributions personally or via your own company?
Pensions: tax rules and planning
What tax rules apply to pensions? What tax relief is available? What tax charges can arise? What planning opportunities are there?
General Anti-Abuse Rule (GAAR)
What is the GAAR? What taxes does it cover? When might it apply? What tests are considered?
Disguised Remuneration Zone
What is disguised remuneration? What is the loan charge? How can I settle disguised remuneration, EBT or contractor loans with HMRC?
External link
Disguised remuneration: tax avoidance using unfunded pension arrangements (Spotlight 58)