HMRC is aware of tax avoidance arrangements used by owner managed companies and their directors. The arrangements are used to reward a director for the services they provide to a company. This is done in a way that seeks to avoid paying Income tax and National Insurance contributions, while obtaining Corporation Tax relief at the same time.
HMRC strongly believes these arrangements do not work. We’ll seek to challenge anyone promoting or using these arrangements and we’ll 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.
How the arrangements are claimed to work
The company enters into an agreement with its director to give that director the rights to receive a pension from the company in the future. However, due to the structure of the arrangements, HMRC believes that the pension is never likely to be paid to the director. The company then claims a Corporation Tax deduction. This deduction is equal to, what is claimed to be, the current value of the total future pension to be paid to the director.
Many arrangements include further steps where the company transfers its obligation to pay the director a pension in the future to a third party. In exchange for this, the company agrees to pay the third party. This payment may be made directly to the third party or the third party can ask for the payment to be made to the director instead. The third party is often a relative of the director or another director of the same company.
It’s claimed that the arrangements result in the director, or a third party closely associated with the director, receiving funds from the company with no immediate liability to Income Tax and National Insurance contributions.
These arrangements often result in unusual outcomes. For example, a spouse agreeing to pay their partner a pension without receiving anything in return.
What will happen to those who use the arrangements
HMRC strongly believes these arrangements do not achieve the tax savings promised. HMRC will challenge anyone promoting such arrangements and investigate the tax affairs of all users.
A company that uses these arrangements is unlikely to be able to claim the Corporation Tax relief intended. This is because the expense recognised in the company accounts may not be in accordance with generally accepted accounting principles (GAAP), or may be disallowed for other reasons.
Where arrangements involve transferring the obligation to a third party, users may also find that additional Income Tax and National Insurance contributions are due from the company and company directors on the amount due to the third party. Other tax charges may also arise.
Users of these arrangements may be charged a penalty for submitting an inaccurate tax return to HMRC. For tax returns sent to HMRC after 15 November 2017 relating to a tax period that began after 5 April 2017 and ended after 15 November 2017 users will be charged a penalty because of carelessness, unless they can show HMRC that they took reasonable care.
HMRC is also considering whether the General Anti-Abuse Rule (GAAR) may apply to any arrangements entered into after 16 July 2013. Where the GAAR applies and the arrangements were entered into after 14 September 2016, you may be subject to a 60% GAAR penalty.
Users will also be charged interest on any tax paid after the statutory due date.
HMRC will pursue anyone who designs, promotes, sells or otherwise enables others to use these arrangements.
This includes charging an enabler penalty on those who enable the use of abusive tax avoidance arrangements, which are later defeated by HMRC. The penalty will be equal to the fees received by the enabler for enabling the arrangements.
This penalty applies where any of these arrangements have been enabled and entered into on or after 16 November 2017.
HMRC will also use its powers under the Promoters of Tax Avoidance Schemes regime against those who promote tax avoidance schemes.
Scheme promoters should carefully consider the Disclosure of Tax Avoidance Schemes (DOTAS) legislation to decide if the arrangements they are marketing should be declared to HMRC.
What to do if you’re using this or similar arrangements
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. We offer a wide range of support to get you back on track or avoid being caught out in the first place.
Anyone concerned about the schemes they are currently using should consider getting independent professional tax advice or speak to one of the tax charities. Anyone with concerns can also contact HMRC.
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.
If you’re facing difficulty in making a tax payment you should ask us about affordable monthly payment options. We’ll always try to work with you to negotiate time to pay based on your income and expenditure.
Time to pay arrangements are based on an individual’s specific financial circumstances, so there is no ‘standard’ time to pay arrangement. We look at what you can afford to pay and then use that to work out how much time you need to pay and over what time period.
By withdrawing from the arrangements and settling your tax affairs, you’ll:
If you’re already speaking to someone in HMRC about your use of an avoidance scheme, you should contact them to discuss this further.
If you do not have an HMRC contact and you want to get out of this or similar arrangements, email CAGetHelpOutOfTaxAvoidance@hmrc.gov.uk.
Get more information or report a scheme
Find out more about how to identify tax avoidance schemes.
You can report tax avoidance arrangements, schemes and the person offering you the scheme to HMRC.
You can phone HMRC if you cannot use the online form.
