Understanding Disguised Remuneration and Tax Avoidance
This article explores HMRC’s stance on disguised remuneration and tax avoidance through the use of unfunded pension arrangements. These arrangements involve a company establishing an unfunded pension obligation to provide a pension for one or more of its directors.
In previous articles we discussed the difference between tax evasion and tax avoidance, as well as HMRC's efforts to tackle these issues, including civil investigations through the COP 9 procedure and potential criminal investigations. HMRC squarely place unfunded pension arrangements in tax avoidance.
Among many schemes confronted by HMRC, this type of tax avoidance arrangements enables owner managed companies and their directors to reward a director for his services in a way that avoids Income Tax and National Insurance contributions, whilst allowing the company to claim relief from Corporation Tax.
Tim Thompson of KANGS outlines the mechanics of such schemes.
The Fundamentals of an Unfunded Pension Arrangement
As with many such schemes, HMRC warns that they do not work. They will always seek to recover the correct amount of tax from those involved, and where applicable, impose interest on unpaid taxes and issue penalties.
The operation of such an arrangement may well involve considerable expenditure for the setup and management, and HMRC urges caution before entering into, what they regard to be, a fruitless exercise.
The procedure may involve:
- the company creating the right for the director to be paid, at the correct time, a pension from the company,
- a Corporation Tax deduction being claimed by the company of the amount of the current value of the pension which is allegedly due to be paid to the director,
- the future pension payment requirements being transferred to a third party, frequently a relative or another director,
- the company paying the third party who has assumed the responsibility to pay the director.
The intent is that the director ultimately receives the funds in a manner which avoids Income Tax and NIC. However, amongst other potential failures in such a system, HMRC states that a company promoting such activity is highly unlikely to be allowed to claim the Corporation Tax as intended because the expense, when claimed, may not comply with accepted accounting principles.
HMRC’s Position on Disguised Renumeration
HMRC maintains that such arrangements are abusive of the tax system, which position has been supported by the General Anti-Abuse Rule (GAAR) Advisory Panel, an independent advisory panel which advises and provides opinions to HMRC upon matters involving abuse.
The Advisory Panel has stated that unfunded pension schemes are not consistent with the principles of the current legislation and that it is not a reasonable course of action to enter into, or carry out, such tax arrangements.
HMRC stated that it wishes to help people avoid tax avoidance schemes to protect their interests. It offers a wide range of support to help users leave such schemes and settle their tax affairs without facing any penalties. Failure to take advantage of such opportunities will result in substantial penalties and interest being imposed.
How Can We Assist?
Individuals found by HMRC to have deliberately entered in schemes designed to illegally evade payment of tax may face substantial financial penalties.
If HMRC is investigating you for involvement in a tax avoidance scheme, such as an unfunded pension arrangement, it is essential to seek legal advice immediately, as the consequences can extend beyond significant fines.
At KANGS, we specialise in defending clients facing HMRC investigations. Our skilled team will guide you through the complex legal process, requiring a detailed understanding of the tax system. Our solicitors will protect your rights and develop a strategy to achieve the best possible outcome for your case
Contact us today using the details below for a confidential consultation and let us help you navigate the complexities of your tax investigation.
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through live conferencing or telephone.
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