HMRC has issued Spotlight 58 which warns against tax avoidance involving unfunded pensions. The arrangements involve a company creating an unfunded pension obligation to pay one or more of their directors a pension. This is to create an expense in the company accounts to reduce the company’s profit, and therefore reduce the amount of corporation tax payable.
Users of these arrangements may pay considerable fees to use them yet may still have to repay the tax claimed to be avoided, as well as interest and a penalty.
How the arrangements work
The company enters into an agreement with its director to give that director the rights to receive a pension from the company in the future. However, due to the structure of the arrangements, HMRC believes that the pension is never likely to be paid to the director. The company then claims a corporation tax deduction. This deduction is equal to, what is claimed to be, the current value of the total future pension to be paid to the director.
Many arrangements include further steps where the company transfers its obligation to pay the director a pension in the future to a third party. In exchange for this, the company agrees to pay the third party. This payment may be made directly to the third party or the third party can ask for the payment to be made to the director instead. The third party is often a relative of the director or another director of the same company.
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 and national insurance contributions.
These arrangements often result in unusual outcomes. For example, a spouse agreeing to pay their partner a pension without receiving anything in return.
HMRC strongly believes these arrangements do not achieve the tax savings promised, and they will investigate the tax affairs of all users. In addition, HMRC will pursue anyone who designs, promotes, sells or otherwise enables others to use these arrangements, including charging an enabler penalty. If you’re using this or similar schemes or arrangements, HMRC strongly advises you to withdraw from it and settle your tax affairs to prevent building up a large tax bill.
Anyone concerned about the schemes they are currently using should consider getting independent professional tax advice or speak to one of the tax charities. Anyone with concerns can also contact HMRC.