Disguised remuneration: tax avoidance using unfunded pension arrangements (Spotlight 58)

HMRC is aware of tax avoidance arrangements used by owner managed companies and their directors. TheThese arrangements are used to reward a director for the services they provide to a company.company, This is done in a way that seeks to avoid paying Income taxTax and National Insurance contributions, while obtainingthe director obtains Corporation Tax relief at the same time.relief.

HMRC strongly believes these arrangements do not work. We’llWe will seek to challenge anyone promoting or using these arrangements andto we’ll make sure they pay the correct tax is paid.tax.

The arrangements involve a company creating an unfunded pension obligation to pay one or more of their directors a pension. This isstep attempts to create an expense in the company accounts to reduce the company’s profit.profits Theand intended result of this step is to reduce the amount of Corporation Tax payable.

With many of these arrangements, the company then transfers the pension obligation to a closely associated third party. The third party is usually a relative or colleague of the director due to receive the pension. The intended result of this step is a payment to the director or a closely associated third party, with no immediate liability to Income Tax and National Insurance contributions.

Users of these arrangements may pay considerable fees to use themthem. yetYet, maycould still have to repay the tax claimed to be avoided, as well as interest and a penalty.

How the arrangements areclaim claimed to 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 pensiondirector iswill never likelyreceive toa bepension paidpayment. 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 includemay involve further stepssteps, such as one considered by the General Anti-Abuse Rule (GAAR) Advisory Panel. The GAAR is an independent advisory panel which approves HMRC’s General Anti Abuse Rule (GAAR) guidance. They provide opinions on cases where HMRC considers the GAAR may apply.

The further step considered by GAAR is where the company transfers its obligation to pay the director a pension in the future to a third party. InThe exchangethird forparty this,is often a relative of the companydirector agreesor toanother paydirector of the thirdsame party.company.

The Thiscompany paymentagrees mayto bemake madea directlypayment to thethat third partyparty, orso the third partyparty, caninstead askof forthe company, agree to pay the director a pension. This payment tomay be made to the directorthird instead.party, Theor the third party iscan oftenask for a relativepayment ofto thebe directormade orto anotherthe director of the same company.instead.

It’sThese claimedarrangements thatclaim theto arrangements result in the director, or a third party closelylinked associatedto with the director, receiving funds from the companycompany. withThe funds have no immediate liability to Income Tax and National Insurance contributions.

TheseRegardless of the tax effect, these arrangements often result in unusual outcomes. For example, a spouse agreeing to pay their partner a pension without receiving anything in return.

The GAAR Advisory Panel has given its opinion on a set of arrangements by which a company rewarded its director through an unfunded pension obligation. The company and the director claimed there is no liability to Income Tax or National Insurance contributions, but had also:

• transferred the obligation to pay the pension to their spouse in return for a payment to the director’s loan account

• claimed a corporation tax deduction

The GAAR Advisory Panel opinion on the arrangements it considered is that it is not a reasonable course of action either to enter into, or carry out, these tax arrangements.

What will happen to those who use thethese arrangements

HMRC strongly believes these arrangements do not achieve the tax savings promised. HMRC will challenge anyone promoting such arrangements and investigate the tax affairs of all users.

A company that uses these arrangements is unlikely to be able to claim the Corporation Tax relief intended. This is because the expense recognisedshown in the company accounts may not bealign in accordance with generallygeneral accepted accounting principles (GAAP),). orThe expense may also be disallowed for other reasons.

WhereArrangements arrangementsmay involve transferring the obligation to a third party,party. In this case, users may also find thatthat:

• extra additional Income Tax and National Insurance contributions are due — this could be from the company and company directors on the amount due to the third party.party

• other Other tax charges may also arise.arise — they may be charged a penalty for submitting an inaccurate tax return to HMRC

Users of these arrangements may be charged a penalty for submitting an inaccurate tax to return to HMRC. ForThis penalty would be because of carelessness, unless they can show HMRC they took reasonable care for tax returns sent to HMRC after 15 November 2017 relating to a tax period thatboth:

• beginning began after 5 April 2017

• ending and ended after 15 November 2017

In usersdeciding willwhether beto chargedcounteract ayour penaltyarrangements, becauseHMRC ofmay carelessness,refer unlessto theythe canopinion showalready HMRCgiven thatby theythe tookGAAR reasonableAdvisory care.Panel. In this case, both of the following needs to be true:

• HMRCyou ishave alsoused consideringarrangements whetherthat in substance operate in the Generalsame Anti-Abuseway Ruleas (those already considered by the GAAR) mayAdvisory applyPanel

• the to any arrangements were entered into on or after 1617 July 2013.2013

You Wheremay thealso receive an accelerated payment notice if you receive a GAAR appliescounteraction notice. This means you will have to pay the disputed tax upfront while HMRC continues its investigations. There is no right of appeal against an accelerated payment notice, but taxpayers can make representations.

Where the GAAR applies and the arrangements were entered into after 14 September 2016, youusers may be subject to a 60% 60% GAAR penalty. penalty.

UsersThis Spotlight 58 covers arrangements that operate in substantially the same way as those considered by the GAAR Advisory Panel, as well as similar arrangements. HMRC will alsoconsider whether the GAAR might apply to such arrangements. A new opinion would need to be chargedobtained interestfrom onthe anyAdvisory taxPanel paidbefore afterHMRC could counteract the statutoryarrangements dueunder date.the GAAR.

What this means for promoters

HMRCWe will pursue anyone who designs, promotes, sells or otherwise enables others to use these arrangements.

This includes charging an enablerenablers penalty on those who enable the use of abusive tax avoidance arrangements, which are later defeated by HMRC. The penalty will be equal to the fees received by the enabler for enabling the arrangements.

This penalty applies where any of these arrangements have been enabled and entered into on or after 16 November 2017.

HMRC will also use its powers under the Promoterspromoters of Taxtax Avoidanceavoidance Schemesschemes regime against those who promote tax avoidance schemes.

Scheme promoters should carefully consider the Disclosuredisclosure of Taxtax Avoidanceavoidance Schemesschemes (DOTAS) legislation to decide if the arrangements they are marketing should be declared to HMRC.

What to do if you’re using this or similar arrangements

We want to help people steer clear of tax avoidance by asking them to stop, challenge and protect themselves, and others.

If you’re worried about becoming involved in a tax avoidance scheme, or think you’re already involved and want to get out of one, HMRC is here to help. We offer a wide range of support to help get you back on track or avoid being caught out in the first place.

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 about getting out of an avoidance scheme.

If you’re using this or similar schemes or arrangements, HMRCwe strongly advises you to withdraw from it and settle your tax affairs to prevent building up a large tax bill.

If you’re facing difficulty in making a tax payment you should ask us about affordable monthly payment options. We’ll always try to work with you to negotiateset up a time to pay arrangement based on your income and expenditure.

Time to pay arrangements are based on an individual’s specific financial circumstances, so there is no ‘standard’ time to pay arrangement. We look at what you can afford to pay and then use that to work out how much time you need to pay and over what time period.

By withdrawing from the arrangements and settling your tax affairs, you’ll:

• avoid the costs of investigation and litigation

• minimise interest and penalty charges (where they apply) on tax you should have paid

If you’re already speaking to someone in HMRC about your use of an avoidance scheme, you should contact them to discuss this further.

If you do not have an HMRC contact and you want to get out of this or similar arrangements, email CAGetHelpOutOfTaxAvoidance@hmrc.gov.uk.

Get more information or report a scheme

FindYou outcan morecontact aboutHMRC how to identifyreport tax avoidance schemesarrangements.

You, can report tax avoidance arrangements, schemes and the person offering you the schemescheme. You can do this anonymously and do not have to HMRC.give your name, address or your email.

You can phone HMRC if you cannot use the online form.