The General Anti-Abuse Rule (GAAR) Panel has issued its opinion on an employee reward arrangement involving the creation and sale of a pension obligation with the consideration paid to the owner of the pension obligation.
The GAAR panel was asked to consider planning which involved a company incorporated in early 2015.
- R became the company's sole director and subscribed for a single A Ordinary share.
- S became the company secretary and subscribed for a single B ordinary share.
Employee reward arrangement
The arrangements operated as follows:
- Stage 1: in early 2016, approximately £180,000 was to be made available to provide an award to R in a way that “would not be any form of remuneration”.
- Stage 2: later in 2016 it was decided that the company would provide R with a £14,526 per year Pension from age 70 (R was aged 45 at the time).
- Stage 3: in early 2017, the company paid S £185,000 to take over the company’s obligation to make pension payments to R.
The overall effect of the arrangements was that:
- R had a right to receive pension payments in 25 years.
- S received £185,000 from the company and had an obligation to pay the above pension to R
- The company claimed a Corporation Tax deduction for its accounting expense.
- No Pay As You Earn (PAYE) Income Tax or National Insurance Contributions (NICs) were paid.
Opinion
The GAAR panel decided that neither entering into nor carrying out the tax arrangements was a reasonable course of action as:
- The arrangements involved abnormal steps.
- While steps 1 and 2 included unusual elements (e.g. the statement that the award “would not be any form of remuneration”) they were not contrived or abnormal.
- It was, however, abnormal to transfer a pension obligation to a private individual who had no demonstratable experience or expertise in the pension business.
- The arrangements were not consistent with the principles on which the relevant legislation (s.62 and Part 7A ITEPA 2003 and s.1290 CTA 2009) was based and the policy objectives of that legislation.
- Although the arrangements did not seek to exploit a specific loophole in the employment Income Tax legislation, the outcome was to exploit perceived shortcomings in Part 7A compared with the company simply funding a third party to provide a pension to an employee.
- If the arrangements were technically successful, there was a shortcoming in the relevant legislation as the intention of Part 7A was such that it would apply to arrangements such as these.
- There was no evidence that the arrangements were in line with established practice, nor that HMRC had indicated its acceptance of the arrangements.
- There was a tax advantage.
- For an Employer-Financed Retirement Benefits Scheme (EFRBS) under Part 7A, there is typically an employment Income Tax charge when the funds are paid to a third party and earmarked to pay the pension to the employee.
Stages 1 and 2 of the arrangements were reasonable.
Stage 3 was contrived and abnormal, with the involvement of S, an individual connected with R through being a 50% shareholder and company secretary, present at all relevant board meetings and with no apparent experience in the provision of pensions.
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 note looks at the key features of the General Anti-Abuse Rule (GAAR) contained within the Finance Act 2013 and the basics of what you need to know about the provisions it contains when considering tax planning.
Pension contributions: Personal or company?
Is it more tax-efficient to pay pension contributions personally or via your own company?
Employer-Financed Retirement Benefits Scheme (EFRBS)
What are Employer-Financed Retirement Benefits Schemes (EFRBS or EFURBS)? How do they work? What are the tax implications and consequences?
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