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image of definition of promise ripped in two | accountingweb | We all need pensions, but you must stick to the tax rules
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Company’s pension plans were empty promises

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The engineering business in this upper tribunal case wanted to offer a pension but they also wanted to retain their money within the firm as working capital.

25th Jun 2024
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Particularly important for any company that finds itself in the position of generating profits rather than cash is the landmark case settled in the upper tribunal in spring this year of AD Bly and others vs Commissioners for HMRC. AD Bly, a specialist groundwork and civil engineering business wanted to provide pensions for their directors and certain key employees. 

However, a shortage of working capital meant that the company’s available cash was needed within the business and could not be paid into a pension scheme in the conventional way. So, the company promised to provide a pension in the future when the directors retired. What was at stake was whether the cost of this promise could be offset against corporation tax in the year that the promise was made. The outcome of the appeal was that it could not. 

Aggressive tax planning

This was a legal case about whether pension contributions constitute a business expense, and whether they were eligible for corporation tax relief or whether they had strayed too far in the direction of aggressive tax planning and so should be denied this customary pension tax break.

“We all need pensions”, the title of a landmark pensions research report written in the first year of Tony Blair’s government, is a sentiment highly relevant to this case.

The 30m of us in the UK who are undertaking regular paid work have become used to, and indeed dependent on, our regular wages. That monthly or weekly pay packet feeds, clothes and houses us and our dependants until the next pay packet arrives. But looming ahead in the distance is this thing called retirement. From your first day of retirement onwards those regular pay packets stop arriving in your bank account.

Continued regular income

So we do all need pensions, so that we have a continuing regular income to feed, clothe and house us once our work and pay stops. But this income really isn’t about money, it’s about us having a method  of persuading people younger than us, who are still working after we retire, to provide us with all the goods and services we need after we hang up our working boots. There are very few goods that we can lay down as a lifelong store – vintage claret and port in the cellar perhaps, but bread and milk definitely not!

The concept behind pensions is that we build up something during our working lives that we can then trade during our retirement to get the younger generation to supply us with everything we need, and to keep on doing so for as long as we live. Savers should therefore structure their pension to contain something that will be useful for these future trades.

Intergenerational contract

The Mansion House Compact, launched last year with great flourish by our Chancellor of the Exchequer and many leading pension providers, recognises the importance of bolstering and protecting this intergenerational contract. By committing to invest in funding young and growing companies, they are investing in tomorrow’s promising businesses – the ones that will provide attractive well-paid jobs for our children and grandchildren. That’s the sort of asset that tomorrow’s workers will also want to own, and so will use their own savings to buy these off today’s savers, who will use the decumulated proceeds to pay their living expenses.

We are hearing a similar argument for encouraging pension funds to invest more in Britain and less overseas. It is British workers and carers that our future pensioners will be dependent on, and it will be easier to trade with them if you hold British assets, not overseas ones.

Saving options

There are three main ways of saving for our retirement. Firstly, a pension plan, which could be an individual or a collective plan and will be able to own these assets in trust. These have an established framework of governance and taxation, among which are firm rules limiting the extent to which the pension can invest in the business that employs the worker. That’s a simple separation of risk, so if the business fails, the pension survives.

The second popular method is housing. Whether your plan is to trade down from a large family home to a retirement cottage, or to build up a portfolio of buy-to-let or commercial properties, we have clear laws and taxes that apply to these scenarios.

Thirdly, we have the family business. There are more than 5m family firms in the UK, making up 86% of all private sector firms with an annual turnover of circa £2trn. They employ 14m people, which is around half of the private-sector workforce. 

Successful family businesses do represent an asset that can be sold to the next generation, and I well remember my parents buying out my great uncle when he retired in his mid-70s from the family firm. Again, there are clear tax rules, and they tend to be quite favourable to small entrepreneurial companies.

Combining methods did not work

My view of the case before the upper tribunal is that the appellants had been confused over whether they were following routes one or three as I’ve set out above. They wanted to have a pension but they also wanted to retain their money within their firm as working capital. This combination did not work.

Straying too far from mainstream pensions, they set up an unfunded unapproved retirement benefits scheme (UURBS), and sought to make a future promise to pay a retirement income and to get tax relief on that now. HMRC made what in my opinion was the right decision, namely that the purpose of their UURBS was not wholly and exclusively for the purposes of a trade.

Replies (12)

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By Justin Bryant
25th Jun 2024 15:49

Interestingly, this planning should work fine if implemented properly as a genuine pension. See:

https://www.accountingweb.co.uk/any-answers/interesting-ct-we-case

Thanks (1)
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By Paul Crowley
25th Jun 2024 17:51

They paid nothing but wanted tax relief on a vague promise? The promise being that the taxpayer will pay all the profit it makes? So no tax ever?
Who makes up this stuff?

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Replying to Paul Crowley:
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By FactChecker
25th Jun 2024 20:03

People who may never need a pension ... because they've made more than enough prior to retirement by creating/promoting a methodology in return for high fees?

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By ColA
26th Jun 2024 09:14

I have seen this attempted over the years. The naivety of owner-directors masks a dubious motive to have both the proverbial cake & eat it.
Pensions are a minefield. We only need remember the infamous Maxwell whose machinations led to him ending up in the sea.
Self-serving greed is all too transparent.

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Replying to ColA:
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By Paul Crowley
26th Jun 2024 10:35

A similar scam was to create a 'liability' for GDPR penalties for a possible future breach. Have not seen that one mentioned recently.

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Replying to Paul Crowley:
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By Justin Bryant
26th Jun 2024 11:08

Yes; I linked the two and DN then blatantly plagiarized my OP!

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By Justin Bryant
27th Jun 2024 13:01

I'm not sure that I understand/agree with this TJ bloke's analysis:

https://www.taxjournal.com/articles/provisions-

See here re provisions and GAAP accounts: https://www.accountingweb.co.uk/any-answers/well-done-to-the-sc

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Replying to Justin Bryant:
By Ruddles
27th Jun 2024 16:23

He's right and he's wrong. I can't remember the detail of the case, and have no intention of reading it again, but a provision is not deductible unless an obligation to pay the expenditure in question has arisen as a result of past events. Merely providing for something that the company may choose to pay in the future is not usually sufficient to secure a deduction. So he's 'right' on that point.

However, it does not need to sit as a creditor. One example is provision for dilapidations under a lease. The obligation to make good the property accrues during the tenant's occupancy and it is therefore correct to provide for the expenditure that the tenant will be obliged to pay in future as a consequence of past events. But that provision will be just that, and would not normally sit within creditors.

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Replying to Ruddles:
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By FactChecker
27th Jun 2024 21:35

"However, it was a provision: a figure which the accountants considered the company would probably have to pay sometime in the future.
But s 54 requires the expense to be ‘incurred’."

My reading of that is in line with your first para ... or in much simpler (and therefore not entirely accurate) language:
'probably' have to pay 'sometime in the future' is at least one too many degrees of uncertainty that the expense will ever be, let alone has already been, incurred.

Thanks (2)
Replying to FactChecker:
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By Justin Bryant
28th Jun 2024 08:50

You need to ignore small animal commentary and read the above link to the SC decision on this GAAP provision point.

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Replying to Justin Bryant:
By Ruddles
28th Jun 2024 11:25

Missing the point (admittedly one that I made clearer on another comment on the topic), as per usual.

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Replying to Justin Bryant:
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By ColA
04th Jul 2024 15:17

What is clear that no book entry is feasible for an intention to create a fund without actually transferring money into said fund.
Many have tried the wheeze of creating a special bank account for pensions, especially for owner/directors, only to have it disallowed as not being in any form of contractual commitment towards pensions.

Thanks (1)