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Pension contributions
Draft guidance on employers' contributions to registered pension schemes, after 6 April 2006, has been published by HMRC. Notable among the guidance is HMRC's proposed BIM46025 which states:
'It is possible that the right question is not so much the level of pension contributions, as the level of salary. Does the level of the salary reflect the value of the work undertaken by that individual for the employer? If not, then it is likely that that there is also a non-business purpose for the payment of the pension contributions.
'Where the salary is less than the commercial rate and the size of the pension contribution appears to have been inflated, you will need to establish why this has been done and whether any tax or National Insurance planning for the employees was one of the purposes for the size of the pension contribution rather than an incidental benefit arising from it.'
It seems from this that HMRC consider that remunerating a director by means of a limited salary and substantial pension contribution would not necessarily be for the purposes of the trade and would therefore be non-allowable for tax relief.
Any comments should be submitted to HMRC by 17 February 2006.
www.hmrc.gov.uk
Dividend stripping
Legislation will be included in the next Finance Bill to stop financial institutions and share dealers claiming wholly artificial losses by buying and selling the right to a dividend on shares and claiming that the sale proceeds are exempt from tax, Dawn Primarolo announced in the House of Commons on 20 January. These schemes have been disclosed to HMRC under the disclosure régime, the aim of them being artificially to generate losses by buying and selling the right to dividends on shares.
An HMRC press release explains further that such schemes 'exploit a perceived weakness' in TA 1988, s 730, which deals with the sales of a right to a dividend on shares where the shares themselves are not sold, i.e. dividend stripping. Subsection (3) provides that where the right has been bought and then sold on before receipt of the dividend, the proceeds of the sale are not regarded as income of the seller. It has been argued that this exemption applies to a financial trader which nevertheless claims to deduct the cost of the strip in calculating its profits and losses for tax purposes. This has the effect that the financial trader makes a loss for tax purposes approximately equal to the cost of the strip.
Section 730(3) will be repealed, effective in relation to any sale, transfer or other realisation of a right to receive a dividend taking place on or after 20 January 2006.
HMRC news release dated 20 July 2006; Hansard, 20 January 2006, vol 441, no 96, col 37ws
