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 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.

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)

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