Spotlight on schemes using pension arrangements

HMRC has published Spotlight 58 on disguised remuneration: tax avoidance using unfunded pension arrangements, which highlights arrangements used by owner-managed companies to reward directors for the services they provide to the company while seeking to avoid income tax and NICs on the payments and also obtaining corporation tax relief.

The schemes involve the company entering into an arrangement to give a director rights to receive a pension from the company in the future. The company claims a corporation tax deduction for an amount equal to what is claimed to be the current value of the total future pension. Some schemes also seek to avoid any immediate liability to income tax or NICs by transferring the obligation to pay the future pension to a third party (in return for a payment from the company).

HMRC has found that, under the arrangements, it is unlikely the pension will ever be paid to the director. HMRC strongly believes that these arrangements do not achieve the tax savings promised, will challenge anyone promoting or enabling such arrangements, and will investigate the tax affairs of all users of such schemes and will issue penalties accordingly – for example, for the submission of inaccurate tax returns.