HMRC has published information on the use of unfunded pension arrangements which are set up in an attempt to avoid corporation tax, income tax and National Insurance (“NI”) contributions.

If you think you have put in place such an unfunded pension arrangement, or are considering setting up an unfunded pension arrangement in the future, you may find the information helpful in understanding the tax treatment that will be applied to that arrangement.

What do these arrangements look like?

A company enters into an agreement with its director to give that director rights to receive a pension from the company in future, but due to the structure HMRC believes the pension is never likely to be paid to the director. The company claims a corporation tax deduction.

Many arrangements involve the company then transferring its obligation to pay the director a pension in the future to a third party (often a relative of the director or another director of the same company), in exchange for a payment to the third party. The company claims that the arrangements result in the director, or the third party, receiving funds from the company with no immediately liability to income tax and NI contributions.

What will HMRC do to users of such arrangements?

HMRC will investigate the tax affairs of all users of such arrangements, with the following potential outcomes:

  • No corporation tax relief because the expense recognised in the company accounts may not be in accordance with generally accepted accounting principles (GAAP), or for other reasons.
  • Where the arrangements involve transferring the obligation to a third party, additional income tax and NI contributions may be due from the company and company directors, along with other tax charges.
  • A penalty for submitting an inaccurate tax return to HMRC.
  • A 60% General Anti-Abuse Rule (GAAR) penalty.
  • Interest on any tax paid after the statutory due date.

What should you do if you are using such an arrangement?

HMRC strongly advises users to withdraw from any applicable arrangement and settle their tax affairs to avoid having to pay a large tax bill. HMRC notes that this will avoid the costs of investigation and litigation, and will minimise interest and applicable penalty charges on tax that should have been paid. HMRC is willing to negotiate an appropriate timetable for payments.