The General Anti-Abuse Rule (GAAR) Panel has issued an opinion on 24 October 2024 on an employee reward arrangement involving the creation and subsequent sale of pension obligations to another employee, with the consideration for taking on each obligation being discharged by payment to the other employee.
The arrangements
In outline, the arrangements operated as follows:
- A company made £150,000 available to provide awards to B and C as an incentive "in a manner that would not constitute remuneration".
- B and C decided that £70,000 and £80,000 should be made available to them respectively, in respect of work in the year ended 30 April 2017, on the condition that the awards would be provided via index-linked unfunded Pension arrangements.
- Subsequently, B and C agreed to take over the company’s pension obligation in respect of each other, in return for the company undertaking to pay £76,000 and £66,000 (the values of the pension obligations) to them both respectively.
- Transfer agreements were executed and the payments of £76,000 and £66,000 were made to B and C.
- The company claimed a 'pension' deduction for Corporation Tax purposes based on a provision of £150,000 (following the transfer of obligations, this was reduced to £142,000).
Opinion
The GAAR panel decided that neither entering into nor carrying out the tax arrangements was a reasonable course of action as:
- The substantive results of the arrangements were not consistent with the principles and policy objectives of the provisions on which they were based.
- A clear principle and policy objective for both remuneration and retirement benefits (other than registered pension schemes) is to link the timing of a Corporation Tax deduction with the timing of a receipt of employment income for tax purposes.
- Generally, a deduction is given in the same accounting period as a receipt of income for tax purposes or in an accounting period ending not more than nine months earlier.
- The effect of the arrangements was for the company to obtain a Corporation Tax deduction a long time in advance of any receipt of income for tax purposes.
- There were one or more contrived or abnormal steps.
- The director’s consent to transfer the pension liability to the other director was abnormal as were the steps involving the assumption of the pension obligations by the two individuals.
- It is unusual for an individual to assume an obligation to pay a pension, whether for consideration in the form of a fixed sum of money or otherwise.
- This was particularly the case given the long period of time over which a pension liability extends (possibly more than the individual who has assumed the liability) and the economic risks inherent in assuming an obligation to pay a pension (which an individual would not normally be prepared to accept).
- Given that the reward of a pension to each director had already been met by the company, the additional steps of passing the pension obligations to each director were contrived.
- The arrangements were intended to exploit shortcomings in the relevant tax provisions
- The arrangements sought to obtain a Corporation Tax deduction that bypassed the rules that defer a deduction until such time as there is a receipt of taxable income.
- In doing so, the origination of a legal obligation, before any third party being involved, which is then passed into the hands of a third party, appeared to be designed to exploit a perceived shortcoming in the Part 7A ITEPA 2003 rules.
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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