Budget clamps down on retirement scheme tax avoidance

The coalition government has adopted a Labour measure to foil tax avoidance
through offshore trusts and vehicles, but has also gone a step further by
bringing retirement benefit schemes into the spotlight.

The move also reinforces HMRC’s crackdown on the football industry, reported
by Accountancy Age, because clubs use the benefit schemes to pay players,
advisers say.

The March 2010 Budget announced action to tackle arrangements using trusts
and other vehicles to reward employees which seek to avoid, defer or reduce
liabilities of employees and directors to income tax and NICs or to avoid
restrictions on pensions tax relief.

“Legislation will take effect from April 2011. The Government confirms that
Employer Financed Retirement Benefit Schemes (EFRBS) are within the scope of
this measure,” the Budget Red Book said.

In terms of pensions, advisers say the taxman wants to class the EFRBS as
part of your employment income and should therefore be taxed.

However, doubts have been raised about how this will be achieved.

Sarah Pickering a managing director at Alvarez & Marsal Taxand said:

“They know that there is money leaking but stopping it is very difficult.
They don’t truly know what’s going and it could potentially open more loopholes
than it closes.”

Pickering also questioned the government opting for a general rather than
focused approach to the issue

“HMRC is trying to have a really broad but tax law in the UK is made by
specific legislation.”

Cathy Corns: “HMRC has said they are going to do this but what we don’t know
is how.

“I can’t see how you are going to charge NIC on employers contributions’ to a
pension scheme.”

Companies are also in line for a corporation tax deduction when they finance
an EFRB.

Alastair Kendrick, tax partner at Mazars warned that the clampdown may put
off smaller companies because of the advisory fees associated with setting up
the schemes and having a trustee to manage it.

But EFRBS would still be attractive to businesses with deeper pockets until
the new legislation came in, he said.

“For small companies with a small bonus pot the EFRBS may not be an option,
but for those with deeper pockets they may think that it’s still worth it.”

An HMRC spokesperson said the taxman could not comment on individual business
sectors, but did reinforce a commitment to foil tax avoidance in this area.

“The Government will be taking action to prevent efforts to avoid tax and
National Insurance Contributions (NICs) on earnings provided through the
use of trusts and other vehicles.”

“Employers and employees are entering into arrangements using trusts and
other vehicles that seek to avoid, defer or reduce liabilities to income tax and
NICs on earnings or that seek to avoid restrictions on pensions tax relief.”

In some cases these arrangements seek to rely on the use of complex
intermediary structures, some of which were offshore, the spokesman added.

“The Government is considering options for tackling these arrangements,
including those which seek to avoid the restrictions on tax relief for pension
schemes, and intends to introduce legislation in due course to take effect from
6 April 2011,” the spokesman said.

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