HM Revenue and Customs is looking to put a stop to tax avoidance schemes which are attempting to avoid corporation tax, income tax and national insurance contributions by using unfunded pension schemes.
In a spotlight announcement, published yesterday (June 14), the tax authority said it was aware that some companies and directors were using a tax avoidance scheme, which involved setting up pensions, and warned it would challenge anyone promoting or using these methods.
The tax avoidance schemes apparently operate by the company setting up an unfunded pension scheme and agreeing to give its director a pension in the future.
This is to create an expense in the company accounts to reduce its profit, with the aim to reduce the amount of corporation tax payable.
However, due to the structure of the arrangements, HMRC believes that the pension is never likely to be paid.
The company then claims a corporation tax deduction which is equal to (what is claimed to be) the current value of the total future pension to be paid to the director.
With many of these arrangements, the company then transfers its obligation to pay the pension to a third party, HMRC found.
In exchange for this, the company agrees to pay the third party, either directly or the third party can ask for it to pay the director instead.
The third party is often a relative of the director or another director of the same company, HMRC said.
According to the tax authority, this results in the director, or the third party, receiving funds from the company with no immediate liability to income tax and national insurance contributions.
But HMRC said these schemes often result in “unusual outcomes”, for example, a spouse agreeing to pay their partner a pension without receiving anything in return.
The tax authority has said these arrangements do not achieve the tax savings promised and warned it will investigate the tax affairs of all users.
HMRC stated: “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.
“Anyone concerned about the schemes they are currently using should consider getting independent professional tax advice or speak to one of the tax charities.
“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.”
HMRC said a company that uses these arrangements is unlikely to be able to claim the corporation tax relief intended because the expense recognised in the company accounts “may not be in accordance with generally accepted accounting principles, or may be disallowed for other reasons”.
It also said that additional income tax and national insurance contributions could be due from the company and directors on the amount due to the third party.