My client's year end was 31 January 2019 and at that time, he was unaware if he could make pension contributions from the company.
Now the accounts have been finalised, there was profit in the company to allow for the contributions to be made. Is it possible to accrue for these in the 2019 accounts or can contributions only be recognised on a cash basis?
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Was there an obligation to make the contribution at the b's date, or did it arise afterwards?
Even if accounting rules allow/require you to accrue, no tax relief until the period in which they are paid. So no real benefit in doing so.
Think I can agree with Wilson Philips. Company pension contributions is one of those areas you have to be extremely careful about. Always make sure you know the tax rules here and abide by them meticulously.
No tax relief but there would be a deferred tax impact if the pension contributions are accrued.
I had a case where the pension contribution was made in month 14, i.e. after the year-end. We extended the accounting period to 18 months. The tax relief was still in the later 6 months, but it did spread the profit over the 18 month period. Detailed tax computation showed this clearly, and passed muster.
Well, as it turned out, the contribution wasn't made after the "year" end, was it?
Interesting, though, that you say that the relief was given in the second 6-month period. It may be academic, but that is wrong - the deduction should simply have been reflected in computing the tax-adjusted profits for the entire 18-month period, which are then time-apportioned.
Not quite. There are two distinct Accounting Periods, the first of 12 months, the second of 6. The profits before the pension contribution are apportioned 12:6. But the contribution may be set only against the profits of the 6 month period. To be absolutely sure, I consulted both HMRC and a tax specialist.
Unless the size of the contribution were such that a straightforward time apportionment would not give a just and reasonable result. But that would be highly unusual.
It is my understanding that directors' bonuses can be accrued into the annual accounts and claimed as a tax deduction in the year of accrual as long as
the bonus is paid within 9 months of the year end date.
Is it then a condition of this tax allowance that such accrued bonuses must be paid by way of a 'payroll reportable' payment and cannot be paid by means of an additional employer's contribution to the directors' pension ?
Don't get hung up on "bonus". The 9-month rule simply applies to remuneration and not specifically to bonus payments. There is specific statutory provision for pension contributions.
Thank you.
I now see this is clearly spelled out in HMRC's Pensions Tax Manual at PTM043100
That's a very interesting point. I think it would be a case of looking at whether there was a genuine bonus or whether this was just a fudge to try and get tax relief.
If the bonus was a contractual (implied or express) condition and the decision to turn it into a pension contribution was one made after the year-end I cannot see the basis for disallowing the expense in the earlier period. At least I hope not as one of my clients has been doing this on and off for years, his bonus is included in his contract of employment so is a requirement to provide for and he makes the decision of how much of the bonus to take in cash and how much to put into his pension shortly before the due date.
It doesn't matter what you call it. A pension contribution is a pension contribution and statute says that you can get relief only in the period in which it is paid.
FA 2004 section 196(2)
Furthermore, 'remuneration' - for the purposes of the 9-month rule - is effectively defined as earnings, which of course do not include employer pension contributions.
Your client needs to be advised accordingly.
If the bonus was a contractual... and the decision to turn it into a pension contribution.... he makes the decision....
He makes the decision. What you may have here is a pension contribution by the employee out of his contractual cash bonus.
You need to think about the contractual obligations as the tax treatment will be very different depending on what these are. It seems to me entirely appropriate not to add back a contractual cash bonus that the employee pays into his pension; however if the obligation is to award "something" to such and such a value, then of course you provide for that value but you must add back any part of the something that is a pension contribution by the employer.
If you extend the year-end to include a time when the pension contribution was paid (assuming it doesn't result in a period in excess of 18 months) you could get a proportion of the tax relief.
Yes, that's why we did it. If the taxable profit were, say £180,000 for the 18 month period, and the pension payment in month 14 was £50,000. you would end up with taxable profits of £120,000 in the first 12 month period and just £10,000 in the second 6 month period. I confess I fail to see the point you are making.
The point that both he and I are making is that you, HMRC and the specialist tax adviser are all wrong. In the example above you would have taxable profits of £86,667 for the first 12-month period (ie effective tax relief of £33,333 of the pension payment) and taxable profits of £43,333 for the second 6 months. You deduct the pension contributions to arrive at the tax-adjusted profits for the 18 months and THEN time-apportion.
I should have been clearer: the taxable profit of £180,000 was after adding back the pension contribution.
I understand that. But there is no need to add back, or make any other adjustment for, pension contributions that are paid by the end of the period of account. That is where you are going wrong.
You have a massive misunderstanding. The fact that HMRC and some other lunatic share the misunderstanding does not prevent it being a misunderstanding.
I agree with Wilson that the total profits taxable of £130,000, that we all agree on, are split £86,667 to the 12-month period and £43,333 to the 6-month period, based on a proper interpretation of the law.
I was led to believe that each period of account was to be regarded separately. Just as you'd add back the depn., entertainment etc, the pension payment had to be added back and then allocated to the actual period in which it was paid. I am surprised that the experts (HMRC and the consultant) got it so wrong.
Yes, but you're confusing periods of account (CTA 2010, s 1119) with accounting periods (CTA 2009, s 9-10).
You calculate the profit or loss of the (18-month) period of accounts, and then apportion it between the two (12-month and 6-month) accounting periods (per CTA 2010, s 1172).
FA 2004, s 196(2) then says that pension contributions are to be allowed in the PERIOD OF ACCOUNTS (not accounting period) in which they are paid.
I know this is an old thread so forgive me for opening it up again - the subject matter is relevant to my query. My husband has a Limited Company that he was using to invoice for consultancy services earlier in the year. He now has a new job as an employee but his new Company do not yet have their senior staff pension in place so he has not had any real pension contributions made this year. He was therefore going to make an Employer Pension Contribution from his Limited Company but we do not know what his total income this year will look like until later so did not manage to make the cash contribution before the original Company year end.
His Ltd Co year end was 30 September 2021 but I have extended it by 6 months to 31 March 2022, however the Company tax return is due for the period to 30 September 2021. In the example above you look at time apportioning the profit. My question is what would happen if all the profit was paid out as a pension contribution to make up for the fact he has had no other contributions made this year. For example - company profit for 12 mths to 30 September is £20,000, employer pension contribution of £20,000 is paid in March 2022. Apportioning would mean there was no profit in either the 12 month or the 6 month period. Would this be allowed?
If not, if he pays Corporation Tax on the £20,000 profit to Sep '21 of £3,800 and then makes an employer pension contribution of £16,200 (to use the company distributable reserves), there will then be a loss of £16,200 in the next Corporation Tax period - can that loss then be carried back against the profit of the previous tax period and the tax payment recovered that way?
I hope this makes sense and would really appreciate any advice/input.
It hasn't actually stopped trading, the amounts going through it are just a lot less because my husband is now employed and therefore there has been a significant drop in the consultancy work going through the company. Sorry - it was a mis-leading example, I was trying to make it easier to explain in the original post. I assume the tax deduction would be allowed on that basis? But is it scenario 1 where the period is aportioned over the 18 months or scenario 2 where there is possibly carry back losses?
I wouldn’t DIY the accounts and tax with that kind of amount involved. Even if the company is still trading the expense may not be tax deductible if not commensurate with his duties.
I am not surprised that HMRC got it wrong. I cannot comment on the aptitude of the so-called tax specialist. I am, though, surprised that a tax adviser doesn't understand the (important) distinction between (tax) accounting period and period of account.
You add back business entertaining, depreciation etc because it is not allowed for tax, end of. You add back pension contributions only if they're unpaid at the end of the period of account - otherwise, you need do nothing with them.