HMRC warn employers not to use Unfunded Pension Arrangements

HMRC are currently attacking a marketed tax avoidance scheme using unfunded pension arrangements to avoid Corporation Tax, Income Tax and National Insurance contributions.

HMRC strongly believes these arrangements do not work and will seek to challenge anyone promoting or using these arrangements and make sure the correct tax is paid.

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. The 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 them, yet may still have to repay the tax claimed to be avoided, as well as interest and a penalty.

See: Disguised remuneration: tax avoidance using unfunded pension arrangements (Spotlight 58) - https://www.gov.uk/guidance/disguised-remuneration-tax-avoidance-using-unfunded-pension-arrangements-spotlight-58