HMRC to challenge some employer-financed retirement benefit schemes – should you consider settling early?

August 15, 2013

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Background 

Many companies operate unregistered pension schemes so as to provide pension benefits to employees above those allowed by registered pension schemes. These are often called employer-financed retirement benefits schemes (EFRBS) and are operated like a normal pension scheme, with a pension and/or lump sum being paid on retirement. While they receive some tax advantages, they are not as generous as those available to a registered pension scheme.    

But some employees have been allowed to access the EFRBS’s funds before retirement (e.g. by way of a loan). Other companies have tried to enhance the tax treatment of EFRBS by, for example, accelerating the corporate tax deduction. We understand that HM Revenue & Customs (HMRC) plans to investigate both of these types of arrangements to see whether a Pay-As-You-Earn (PAYE) and National Insurance contributions (NIC) obligation has already arisen

Where an EFRBS is being operated like a normal pension scheme, and the normal tax regime is being followed, we do not expect any issues to arise; although HMRC may well ask companies to demonstrate this.

Detail

We understand that HMRC will shortly be communicating with companies who’ve carried out what it believe is aggressive tax planning involving EFRBS – for example, lending money to employees or accelerating the corporate tax deduction. HMRC has decided that, in its view, these arrangements can give rise to PAYE and NIC charges and companies will be asked whether they want to settle any ongoing disputes on this basis. Settlement on these terms doesn’t, at first glance, appear attractive. But our experience of similar settlement facilities indicates that there are many circumstances where companies will be better advised to settle than to face continuing costs or uncertainty under the disguised remuneration rules. 

There’s real complexity around some of the tax issues which affect these arrangements, some of which we’ve outlined below:

  • The timing and corporation tax consequence of accepting PAYE and NIC charges needs to be carefully thought through.
  • HMRC's procedural position needs to be addressed.
  • There are important questions around whether grossing-up charges will apply.
  • The impact of the disguised remuneration rules on the tax treatment of the structure going forward. 
  • Where income and capital gains have arisen in structures, there are complex questions around the application of anti-avoidance legislation.

To add to this, our experience is that HMRC’s Isle of Man, Channel Islands or Liechtenstein Disclosure Facilities may be more appropriate settlement mechanisms than the generic settlement offer and should be carefully considered in all cases. 

Our specialist team has considerable experience of negotiating agreements to settle disputes in respect of these and similar structures with HMRC. If any of your clients have implemented EFRBS and would like to discuss how they have been operated and the implications of HMRC's settlement proposal with one of our Tax Dispute experts on a no-obligation basis, you can contact us on 0800 328 8215 or by email [email protected]