BIM46025 - Specific deductions: registered pension schemes: capital expenditure: purchase of a business

A contribution by an employer to a registered pension schemes is not treated as capital expenditure. FA04/S196 (2) (a) treats all such contributions as revenue expenditure.

Contributions to a registered pension scheme made by the purchaser of a trade under an obligation taken on as part of the acquisition of the trade are considered under FA04/S196.

Where the purchaser of a trade takes on obligations as part of the acquisition of the trade, these costs are normally capital expenditure (see BIM35655). However in the case of contributions to registered pension schemes, this is overridden by FA04/S196 (2) (a), which treats all contributions as revenue expenditure.

Example

Company A purchases a business previously carried on by Company B. As part of the deal, Company A takes over the obligations in respect of the pensions for the employees and former employees of the trade that it acquires. At the time of the transfer the scheme was underfunded by £5m. Over the next three years, Company A pays sums into the pension scheme to fund the scheme fully.

The payments into the pension fund are not disallowable as capital expenditure. The payments are made wholly and exclusively for the purposes of the trade carried on by Company A, and the deductions are allowable in the years in which they are paid.

Cost of setting up a registered pension scheme

The costs of setting up, as opposed to a contribution to a registered pension scheme, do not fall within Section 196 and so as capital expenditure are not an allowable deduction, on the authority of Atherton v British Insulated and Helsby Cables Ltd [1925] 10TC155 and Rowntree and Co Ltd v Curtis [1924] 8TC678.