Pension funds facing tax clampdown after Revenue loses court battle

Experts believe the Revenue is aiming to increase attempts to tackle the issue of whether it can charge income tax on sub-underwriting activities of pension schemes.

The warning follows the conclusion of a long running court battle last month between British Telecom and the Inland Revenue. The Court of Appeal ruled the Revenue could not charge income tax if the investment is to provide income for a pension investment.

However the Revenue is understood to be deciding whether to lobby the House of Lords to reopen the case.

If the Revenue is successful in reopening the case and wins, large companies could be landed with potentially multi-million pound tax bills, while revenue coffers would be significantly increased.

The appeal centred on whether income earned from the sub-underwriting activities of the trustees at some of the country’s largest private-sector occupational pension schemes should be labelled trading income and remain exempt from tax.

Despite the ruling in favour of BT, which has a pension fund valued at more than £10bn, experts fear the case will not prevent the Revenue stepping up what is believed to be a concentrated fight against large company schemes.

Paul Lynam, KPMG senior manager of tax investigations, warned: ‘Other schemes will certainly be caught out by the Inland Revenue, which is stepping up large company investigations. There is a danger the revenue will investigate each company scheme on a case by case basis.’

Deloitte & Touche corporate tax partner, Chris Fitzgibbon, added: ‘The IR is keen to ensure a number of company pension funds comply with compliance aspects of tax legislation.’

The fears of tax experts were compounded at the appeal, when president, Lord Justice Robert Walker, said other pension schemes could not rely on this decision.

The case arose in 1998 when the Revenue identified the sub-underwriting in the BT scheme at a level above ‘normal activities.’

The Revenue was not available to comment.

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