Share this content
16

Pension contributions in excess of profits in year

Pension contributions in excess of profits in year

Didn't find your answer?

Hi all,

Apologies for what I think might be a stupid question.

I'm sure I've read in the past (or at least dreamed) that HMRC could challenge the corporation tax deduction of employer pension contributions that exceed profits in the year.

However, when I try and find something concrete on this I keep coming back to BIM46035, which does talk about the requirement for the contributions to be W&E for purposes of trade, but doesn't specifically cover the point about profits in the year. I see that there is a link between the two, but wondered if anyone knows of anything more specifically covering my point.

As an example, take a company with a 31/03 year end, with a sole director and shareholder and no other employees. The company will be dissolved and the director wants to make a pension contribution before doing so. The employer has contributed £40k this tax year already. The employer intends to contribute a further £40k next tax year, and it will then start the dissolution process in May. 

However, given that they won't be generating any income in April / May, there won't be any profits in the year. There are, however, sufficient retained profits from which to pay the contribution.

Does anybody see an issue with this?

Thanks

Oliver

Replies (16)

Please login or register to join the discussion.

By Duggimon
10th Mar 2020 09:45

Wholly and exclusively for the purposes of the trade would imply it needs to be for the purpose of remunerating the employee/director.

If no work is being done in the tax year, on what basis can the contribution be for the purposes of the trade?

I don't believe there is a restriction saying the employer contribution has to be made out of profit, it has to not be excessive, meaning presumably that the company has to have sufficient resources to be comfortably able to make the payment, and have earned enough through the work of the director that the remuneration isn't ridiculous (which more or less amount to the same thing) but there doesn't have to be a profit in the year in question for the payment to be made.

I think you'll have to be careful that you have sound reasoning in place as to how the payment can meet the W&E requirement though.

Thanks (0)
Replying to Duggimon:
avatar
By ocooper
16th Mar 2020 12:23

Thanks everyone. So, let's say instead that the company didn't cease trading, but instead, just reduced the level of activity and profits, such that profits were £10k per year. The director still wants to make a pension contribution of £40k in the next tax year.

Duggimon, from what you've said, as long as the company has sufficient resources (which it does: retained profits of £100k), this should be OK from a W&E point of view - am I correct?

Thanks (0)
avatar
By Peter Cane
10th Mar 2020 09:51

If they're not generating any income in April/May has the trade already ceased then? If so, any pension contribution in that period might well be post cessation expenses, which probably won't be relieveable unless there are post cessation receipts to set against it

Thanks (0)
Replying to Peter Cane:
avatar
By Tax Dragon
10th Mar 2020 12:40

Cessation would have brought the relevant CT Accounting Period to an end, so there may well also be an issue with the £40k already paid.

Thanks (0)
Replying to Tax Dragon:
avatar
By The Dullard
10th Mar 2020 12:58

I think cessation is the end of this month, because obviously you can only stop trading on your accounting reference date. Pay the further £40K by the end of the month,then job's a good 'un, subject to the annual allowance charge.

Thanks (0)
Replying to The Dullard:
avatar
By Tax Dragon
10th Mar 2020 13:06

Great. I can actively unlearn a whole load of tax rules. (Normally I rely on passive forgetfulness.)

Thanks (0)
Replying to The Dullard:
RLI
By lionofludesch
10th Mar 2020 13:07

The Dullard wrote:

I think cessation is the end of this month, because obviously you can only stop trading on your accounting reference date.

Aye ? Is that right ?

Thanks (1)
avatar
By Accountant A
15th Jun 2020 20:39

7r p

Thanks (0)
avatar
By Accountant A
15th Jun 2020 20:39

p896r

Thanks (0)
My photo
By Matrix
10th Mar 2020 13:21

Agree with above, no deduction if the payment is made after cessation of trade and even if it wasn’t then the remuneration looks like it could be excessive unless there was an underpayment for previous work done, maybe do a comparison to earlier years and benchmark the total remuneration. How will the company be closed, what will be the value of the reserves? The Director may wish to make a payment personally subject to the annual earnings limit to be cautious or is there annual allowance available from prior years to make an increased payment now if justified?

Thanks (0)
avatar
By Montrose
10th Mar 2020 13:30

Will all the company;s trading activities, including collecting debts be complete by 31/3? If not all activity has stopped, then the period up to when activity ends will be an accounting period, and if as a consequence of the payment of a pension contribution that period shows a loss, that could be claimed in the prior accounting period

Thanks (0)
Replying to Montrose:
avatar
By Tax Dragon
10th Mar 2020 14:55

Absent specific statutory authority (is there some? I've started unlearning stuff), I'd assess that argument (that collecting amounts owed is trading) somewhere on the <---flimsy----hopeless---> scale.

No, it's further to the right than that.

Thanks (0)
Replying to Tax Dragon:
avatar
By Montrose
13th Mar 2020 17:19

I know exactly where Tax Dragon is coming from.

Certainly contribution to a pension[subject to certain statutory exceptions] after trade has ceased is not allowable for CT purposes[see CIR v Anglo Brewing Co Ltd [1925] 12 TC 803].
. Contrast that with O’Keefe v Southport Printers Ltd [1984] 58 TC 88
,So the critical question is when does the company's commercial activity cease, as that is the end of an accounting period
Neither case tells you when the trade ceased ! HMRC seems silent in BIM on how this is to be determined1

CTA 2009 s.10(1)(d)is the relevant statutory provision, but that doesn't help very much. . We are not told what the trade is, so I am not sure how to identify when the trade has ceased with that limited information.

Thanks (0)
Replying to Tax Dragon:
avatar
By Montrose
13th Mar 2020 17:19

I know exactly where Tax Dragon is coming from.

Certainly contribution to a pension[subject to certain statutory exceptions] after trade has ceased is not allowable for CT purposes[see CIR v Anglo Brewing Co Ltd [1925] 12 TC 803].
. Contrast that with O’Keefe v Southport Printers Ltd [1984] 58 TC 88
,So the critical question is when does the company's commercial activity cease, as that is the end of an accounting period
Neither case tells you when the trade ceased ! HMRC seems silent in BIM on how this is to be determined1

CTA 2009 s.10(1)(d)is the relevant statutory provision, but that doesn't help very much. . We are not told what the trade is, so I am not sure how to identify when the trade has ceased with that limited information.

Thanks (0)
avatar
By ocooper
16th Mar 2020 12:24

Thanks everyone. So, let's say instead that the company didn't cease trading, but instead, just reduced the level of activity and profits, such that profits were £10k per year. The director still wants to make a pension contribution of £40k in the next tax year.

Duggimon, from what you've said, as long as the company has sufficient resources (which it does: retained profits of £100k), this should be OK from a W&E point of view - am I correct?

Thanks (0)
Replying to ocooper:
My photo
By Matrix
16th Mar 2020 12:33

You need to reread my reply and check that the payment is not excessive.

Thanks (0)
Share this content

Related posts