The General Anti-Abuse Rule (GAAR) Panel has issued its opinion on a pension rights planning scheme. The scheme, which purported to give a director a credit to reduce his loan account balance while achieving a Corporate Tax deduction and having no Income Tax consequences, was deemed abusive.
- The Company was incorporated in 2007 and was a trading business in the building trade.
- An individual (AA) was a sole shareholder and director.
- In 2016, the Company wished to reward AA and sought advice.
- Tax advisors proposed that AA was granted extra pension rights by the Company.
- The Company agreed to undertake an obligation to pay a pension to AA at a later date, this happened in 2016.
- In 2017, this obligation was taken on by AB, an individual.
- AB was paid to take on this obligation but the payment to AB was offset against AA’s overdrawn loan account.
- As a result of this offset AB received no monies for taking over this future liability.
- The advisors contended that this offset was a repayment for the purposes of s.455.
- The taxpayers contended that Corporate Tax relief equal to the pension award was available for the company and there were no Income Tax or National Insurance liabilities for AA.
The GAAR panel decided that neither entering into nor carrying out the tax arrangements was a reasonable course of action as:
- There was a tax advantage. The GAAR Panel found the proposed result of the steps taken were not consistent with the principles on which the legislation was based:
- The legislative principle from the Income Tax side is to tax rewards made to employees.
- AA has essentially received value from the Company of which he is a director by way of the reduction in his loan account balance, the purported avoidance of Income Tax and National Insurance Contributions (NICs) is not consistent with the legislative principles.
- Corporate Tax restrictions prevent a Corporate Tax deduction for contributions to unregistered pension schemes until a taxable benefit is paid out.
- The proposed Corporate Tax treatment of the contribution is not consistent with that policy.
- Loans to participators legislation impose a tax charge when a loan is received from a close company and not repaid. This charge is repaid once the loan is repaid. It was debatable whether the credit to the loan account represented a repayment.
- There are tax arrangements and these lead to the tax advantage:
- The arrangements resulted in an economic gain for AA but no matching Income Tax charge.
- A Corporation Tax deduction was also claimed.
- The arrangements are abusive:
- While pension provision is a normal course of action, tax planning engaged in setting up arrangements can cross a line and become contrived.
- Seeking advice on how the pension benefit is to be provided is also reasonable.
- The implementation of that advice is in part reasonable, but parts represented contrived or abnormal steps:
- It was abnormal for a private individual who has no expertise in the pension industry to take on a liability to pay a pension.
- There was no guarantee AB would have funds to meet obligations when they became due.
- Because of the transfer of value to AA’s loan account, AB is not receiving additional funds to fund the liability she is taking on.
- There is doubt whether the loan is being genuinely repaid. HMRC technical notes show a clear policy objective to counter such arrangements.
- If the arrangements worked as proposed there would be shortcomings in the relevant legislation.
- There was no evidence that the arrangements were in line with established practice.
Useful guides on this topic
General Anti-Abuse Rule: GAAR (subscriber version)
What is the General Anti-Abuse Rule (GAAR)? When does it apply?
General Anti-Abuse Rule: GAAR at a glance
This is a freeview 'At a glance' guide to the General Anti-Abuse Rule (GAAR) .
Employer pension contributions
Is there a taxable employment benefit if an employer makes contributions to an employee's pension scheme? What are the rules for employer pension contributions?
Directors’ loan accounts: Toolkit (subscribers)
HM Revenue & Customs (HMRC) do a director's loan accounts toolkit for advisers. This is our enhanced version with planning points.