BIM46001: Specific Deductions: Registered Pension Schemes

This guidance outlines when an employer's contribution to a registered pension scheme is allowable as a deduction in computing the employer's trading profits for tax purposes. It applies to accounting periods ending on, or after, 6 April 2006.

If, having obtained the facts, you consider that the contribution was not or may not have been made wholly and exclusively for the purposes of the trade of the employer, you should make a report to Technical Team, Audit & Pension Schemes Services, Yorke House, Castle Meadow Rd, Nottingham, NG2 1BG before challenging the deduction.

This section contains the following guidance:


Reference	Description
BIM46005	Specific Deductions: Registered Pension Schemes: Overview
BIM46010	Specific Deductions: Registered Pension Schemes: Wholly & Exclusively: Introduction
BIM46015	Specific Deductions: Registered Pension Schemes: Wholly & Exclusively: Purpose test
BIM46020	Specific Deductions: Registered Pension Schemes: Wholly & Exclusively: Amount of the contribution
BIM46025	Specific Deductions: Registered Pension Schemes: Wholly & Exclusively: Controlling directors & shareholders
BIM46030	Specific Deductions: Registered Pension Schemes: Wholly & Exclusively: Cessation/ Sale of a business
BIM46035	Specific Deductions: Registered Pension Schemes: Wholly & Exclusively: Cessation/ Sale of a business: Examples
BIM46040	Specific Deductions: Registered Pension Schemes: Wholly & Exclusively: Purchase of a business
BIM46045	Specific Deductions: Registered Pension Schemes: Wholly & Exclusively: Industry wide schemes
BIM46050	Specific Deductions: Registered Pension Schemes: Wholly & Exclusively: Group Schemes
BIM46055	Specific Deductions: Registered Pension Schemes: Timing of deductions
BIM46060	Specific Deductions: Registered Pension Schemes: Payment under contribution notice s38-51 Pensions Act 2004
BIM46065	Specific Deductions: Registered Pension Schemes: Pension Protection Fund

Guidance on other aspects of relief for contributions to Registered Pension Schemes (for example spreading) can be found in the Registered Pension Schemes Manual
Guidance on management expenses is in the Company Taxation manual at CTM08000.

BIM46005: Specific Deductions: Registered Pension Schemes: Overview:

The legislation governing deductions for an employer’s contributions to a registered pension scheme is at FA04/S196 to S200.

The key points are:

Deductions are allowed for contributions made wholly and exclusively for the purposes of the employer’s trade – see BIM46010 onwards
All contributions are treated as revenue expenditure, not capital expenditure [FA04/S196 (2)(a)].
Deductions for an employer’s contributions are allowed for the period of account in which they are paid by the employer [FA04/S196 (2)(b)], and for no other period (FA04/S200), unless the deduction is required to be spread over a number of periods (FA04/S197), see BIM46055.
In other words, the accounting treatment is not followed for tax purposes. The deduction in the Profit & Loss account should be added back in the tax computations and replaced by a deduction for contributions paid during the period of account.
Spreading of deductions may be required under FA04/S197 where there is an increase over 210% in the level of employer contribution from one period to the next. Guidance on this can be found in the Registered Pension Scheme Manual at RPSM05102070 onwards.
Where contributions to a group pension scheme are made by the holding company in the group with each employing subsidiary company in the group being recharged an appropriate amount relating to its employees, the intra-group recharge may be accepted as being a contribution paid by the employer to the registered scheme- see BIM46050.
Such recharges should be accepted as contributions paid by the employer in the period of account in which the holding company paid the contribution to the registered scheme – see BIM46055.

BIM46010: Specific Deductions: Registered Pension Schemes: Wholly & Exclusively: Introduction:

FA04/S196 treats all payments of contributions by employers to Registered Pension Schemes as revenue expenses.

In practice this means that an employer's contribution to a Registered Pension Scheme will be allowable as a deduction if it satisfies the wholly & exclusively for the purposes of the trade test in ICTA88/S74 (1)(a) and ITTOIA05/S34.

The payment of a pension contribution is part of the normal costs of employing staff. It will only be disallowable where there is an identifiable non-business purpose for the employer's decision to make the contribution to a registered scheme, or for the size of the contribution.

There are limited circumstances in which a non-business purpose may exist for all or part of the contribution. The main examples are:

If there is a non-trade purpose for the size of the contribution paid in respect of a controlling director or an employee who is a close friend or relative of the controlling director or proprietor of the business (see BIM46020);
Where contributions are paid by a party other than the former employer after a trade has ceased or been sold (see example 3 at BIM46035). Such contributions are not within the scope of FA04/S196, as they are not paid by the employer, but may be allowable as a deduction under general tax principles.

You should remember that it is always a question of fact whether, in any case, there was a non-business purpose.
BIM46015 to BIM46050 explain how the test applies in the context of pension contributions. More detailed guidance on the "wholly & exclusively" test can be found at BIM37000 onwards.

BIM46015: Specific Deductions: Registered Pension Schemes: Wholly & Exclusively: Purpose

In deciding whether the deduction is allowable the question is whether the decision to make the pension contribution was made wholly and exclusively for the purposes of the trade (ICTA88/S74 (1)(a) and ITTOIA05/S34).

The following principles need to be taken into account in deciding whether the pension contribution passes the wholly and exclusively test:

To find out whether the payment was made for the purposes of the taxpayer’s trade it is necessary to discover the taxpayer's object in making the payment.
The general rule is that establishing the object behind making the payment involves an inquiry into the taxpayer’s subjective intentions at the time of the payment.
The 'purposes of the trade’ means ‘to serve the purposes of the trade’.
The "purposes of the trade" are not the same as "the purposes of the taxpayer".
The "purposes of the trade" does not mean ‘for the benefit of the taxpayer’.
The purpose for making the payment is not the same as the effect of the payment.
A payment may be made exclusively for the purposes of the trade even though it also secures a private benefit. This will be the case if the securing of the private benefit was not the object of the payment but merely a consequential and incidental effect of the payment.

These principles are drawn from the judgement of Millett LJ in Vodafone Cellular & Others v Shaw [1997] 69TC376 at page 436G to 437H. Further information on this case can be found at BIM38220.

BIM46020: Specific Deductions: Registered Pension Schemes: Wholly & Exclusively: Amount of contribution:
The payment of a pension contribution is part of the normal costs of employing staff. There may, however, be occasions where there is a non-business purpose for the level of contribution to a registered scheme. An example of where this may occur is where the contribution is in respect of a controlling director or an employee who is a relative or close friend of the business proprietor or controlling director.

If the pension contribution paid on behalf of such directors or employees is the same as that paid for a third party employee in similar circumstances you can accept that there is no non-business purpose and allow a deduction for the full amount of the contribution.
Further guidance on issues relating to directors who are also shareholders is at BIM46025.

Where the facts show that a definite part or proportion of an expense is not wholly and exclusively laid out or expended for the purposes of the trade, profession, or vocation, only disallow that part or proportion (ITTOIA/S34 (2) and the judgement of Lord Reid in Ransom v Higgs [1974] 50TC1 at page 82).

BIM46025: Specific Deductions: Registered Pension Schemes: Wholly & Exclusively: Controlling directors & shareholders

A pension contribution to a Registered Pension Scheme in respect of any director or employee will be an allowable expense except where there is a non-trade purpose for the payment.

One situation where all or part of a contribution may not have been paid wholly & exclusively for the purposes of the trade is where it is paid in respect of a director who is also a controlling shareholder or an employee who is a close relative or friend.

Whether there was a non-trade purpose for the payment will depend upon the facts of the individual case.

The case of Samuel Dracup & Sons Ltd v Dakin [1957] 37TC377 (see BIM37745 ) only shows that, where there is a non-trade purpose for the payment, then the payment is disallowable.

For example, a small company may employ the only shareholder's spouse. The company pays him a salary of £40,000 and contributes to a registered pension scheme that is to provide him with pension benefits.

The type of additional evidence to look for to be satisfied that the contribution to the scheme is paid wholly & exclusively for the purposes of the trade would be:

Are there any comparable third party employees? If the spouse works alongside an unrelated third party and they have comparable salaries, pension contributions, terms and conditions, this would indicate that there is not a non-trade purpose for paying the pension contribution.
If the pension contribution paid on behalf of the spouse is greater than that for an unrelated third party, then is there any business reason for this? Or is this an indication that there was a non-trade purpose for the payment?
Additional information could indicate that there are special reasons for the size of the pension contribution. For example, the pension fund may have a funding deficit as a result of losses on its investments.
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.

BIM46030: Specific Deductions: Registered Pension Schemes: Wholly & Exclusively: Cessation/ Sale of a business:

The payment of a pension contribution is part of the normal costs of employing staff. Where an undertaking to provide a pension was given to employees as part of their employment package, then the costs of meeting that undertaking for business purposes, will be incurred for the purpose of running the business (CIR v Cosmotron Manufacturing Co Ltd [1997] 70TC292, see BIM38315).

This is not affected by the fact that the decision, or need, to make the contribution to the pension scheme is crystallised after:

the employees retire or leave the employer's service;
the employer ceases to carry on the trade; or
the employer sells the trade or a part of the trade in which the employees work.

Where, in these circumstances, the contribution is not paid to a pension scheme under an undertaking to provide a pension given to the employees as part of their employment package, the cost may not be allowable if it is not incurred for the purposes of carrying on the business. This depends on why the employer decided to make the contribution when it was under no obligation to do so. If the decision to make the contribution was for the purposes of going out of business, the contribution will not be an allowable deduction (see BIM38310 for further guidance on this principle).

BIM46035: Specific Deductions: Registered Pension Schemes: Wholly & Exclusively: Cessation/ Sale of a business: Examples:

The general principles which apply when deciding whether contributions are allowable, if they are made in respect of former employees or after the relevant trade has ceased or been sold, are explained in BIM46030.
This section gives examples of how these principles apply in different situations.

Example 1

A Company decides to sell off its trading activities and concentrate on its property investment business. It operates a Pension Scheme for its employees which has been under-funded for a number of years. Prior to selling its trading activities, it pays £75m into its Pension Scheme so that it is fully funded.

The obligation to make the payment to the pension scheme arose from the remuneration package. It is a cost of carrying on the business that had crystallised at cessation. The contributions are paid wholly & exclusively for business purposes.

Example 2

A Company sells its trade and ceases activity. In the final period, the Company makes a substantial payment into a Registered Pension Scheme on behalf of a director. This Pension Scheme was not part of the director's remuneration package.

You need to establish the facts of the case. The contribution may be disallowable as a cost of going out of business (see BIM38310). Had this been a payment to a pension scheme that was part of the director's remuneration package, then it would be allowable as it would simply be a business cost that had crystallised at cessation.

Example 3

A Parent Company decides to sell one of its trading subsidiaries. The trading subsidiary operated a Registered Pension Scheme for its employees which was fully funded at the time of sale. 3 years after the sale, the former subsidiary ceases trading and it is found that the Registered Pension Scheme is under-funded. The Parent Company has no legal obligations to the Registered Pension Scheme but decides to pay an additional £5m into the Registered Pension Scheme because it is concerned that it could be damaged by the bad publicity arising from the collapse.

The payment falls outside FA04/S196 as the payment is not made by the employer. In this case, the Parent Company can, however, deduct the payment in computing its trading profits as the facts show that it was made for the purposes of protecting its reputation (see BIM35540 for further guidance on this point).

Example 4

Company A decides to sell one of its trading divisions to unconnected Company B. 3 years after the sale, the Company A learns that Company B has ceased trading and it is found that its Pension Scheme is under-funded. Company A has no legal obligations to the Pension Scheme but decides to pay an additional £5m into it. Company A does this because it wishes to reassure its existing employees that their pensions in Company A's own pension scheme are safe.

Company A can make a deduction for the sum under FA04/S196 in its self-assessment as the purpose of making the payment was wholly and exclusively that of its existing trade. The Company chose to make the payment in order to motivate its existing staff.

Example 5

Company A sold its toy manufacturing operations to a 3rd party. The new owner took over responsibility for the pension liabilities of the toy manufacturing operations.
The 3rd party went into administration/liquidation within 12 months and in accordance with the Sale & Purchase Agreement provisions, the pension liability for Company A's former employees transferred back to Company A.
Company A no longer has any toy manufacturing operations but is continuing to trade.

When Company A sold its toy manufacturing operations, the changes were not of a scale that meant that its trade ceased (see BIM70595). Company A is still carrying on the same trade. Company A can make a deduction for the sum under FA04/S196 in its self-assessment as the purpose of making the payment was wholly and exclusively that of its existing trade.

Example 6

A Company decides to close its trading activities and concentrate on its property investment business. It operates a Pension Scheme for its employees which was fully funded at cessation. 3 years after the cessation, following a fall in the value of its investments, the Pension Scheme is under-funded. The Company pays an additional £5m into its Pension Scheme so that it is again fully funded.

The question is the purpose of the expenditure. Why has the Company made the payment? If the Company made the payment to honour a commitment/obligation entered into as part of the trade, then it is post cessation expenditure of the trade. Alternatively, if it is not post cessation trading expenditure, it may be an allowable expense of the Schedule A property business.

BIM46040: Specific Deductions: Registered Pension Schemes: Wholly & Exclusively: Purchase of a trade:

Contributions to a Registered Pension Scheme made by the purchaser of a trade under obligations taken on as part of the acquisition of the trade, are allowable deductions 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 it acquires. At the time of the transfer the scheme was under-funded by £5m. Over the next 3 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 [FA04/S196 (2)(b)].
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.

BIM46045: Specific Deductions: Registered Pension Schemes: Wholly & Exclusively: Industry-wide schemes:

As the payment of a pension contribution to a Registered Scheme is part of the normal costs of employing staff, it will usually be allowable expenditure. This applies also to where the contribution is to an industry-wide scheme.

If the employer's sole object in making the pension contribution is to ensure that its employees receive their appropriate pensions, then a deduction for the contribution is not disqualified just because another pensioner, whose former employer has gone out of business, may also benefit from it.

Payments of expenses often result in benefits to a third party. A benefit to a third party is not, in itself, grounds for disallowing the expenditure provided that the benefit is merely incidental to the purpose(s) for incurring the expenditure. The expenditure will only be disallowable where the benefit to the third party is itself a purpose of the expenditure. For further guidance on incidental benefits see BIM37400.

BIM46050: Specific Deductions: Registered Pension Schemes: Wholly & Exclusively: Group Schemes:

If a Company is a member of a group pension scheme, then relief is given for the amount it has paid to the scheme, if the payment is made wholly & exclusively for the purposes of the contributing company's trade.

A contribution paid by a company other than the former employer after the trade has ceased or been sold is not within the scope of FA04/S196. The payment may be allowable as a deduction under general tax principles (see example 3 at BIM46035).

In a group pension scheme, the levels of contributions are likely to be set for the scheme as a whole. They will not reflect the circumstances of a particular employer. This does not affect whether the payment is allowable.
If the amount paid to the group pension scheme is apportioned between the employing companies on a reasonable basis, informed by actuarial advice where appropriate, then you can accept that the amount attributed to each employing company is incurred wholly & exclusively for the purposes of that company's trade.
Where the contribution to the Registered Pension Scheme is made by one company with amounts being recharged to the employing companies, you can accept that the recharged amounts are contributions to the scheme by the employing companies for the purposes of FA04/S196 (1). Guidance on timing of deductions for such contributions can be found at BIM46055.

BIM46055: Specific Deductions: Registered Pension Schemes: Timing of deduction:

Deductions for employers’ contributions are allowed for the period of account in which they are paid by the employer (FA04/S196 (2)(b), and for no other period (FA04/S200), unless the deduction is required to be spread over a number of periods (FA04/S197).
In practice, as the accounting treatment is not followed for tax purposes, this means that an employer's tax computation is adjusted to:

Add back the deduction for the pension scheme shown in the employer's profit & loss account; and
Give a deduction for contributions to registered pension schemes on a "paid" basis.

Spreading of deductions may be required under FA04/S197 where there is an increase over 210% in the level of employer contribution from one period to the next. If the employer operates more than one pension scheme, you look at the respective contributions to each one separately and not the combined total employer contributions to all scheme. Guidance on this can be found in the Registered Pension Scheme Manual at RPSM05102070 onwards.

In a Group scheme, where the payment is made by one member of the Group and then recharged to the other members of the Group, then a deduction may be given under FA04/S196 for an amount recharged to an employing company, see BIM46050.

Deductions for such recharged amounts should be given under FA04/S196 (2) for the period of account in which the contributions are paid to the Registered Scheme on behalf of the Group.

BIM46060: Specific Deductions: Registered Pension Schemes: Payment under contribution notice s38-51 Pensions Act 2004

The Pensions Regulator was established by the Pensions Act 2004 [PA2004]. The principal purpose of the Pensions Regulator is to ensure that employers meet their obligations in relation to members of occupational pension schemes.

The Pensions Regulator can issue a contribution notice (under sections 38-42 PA 2004), requiring an employer or a third party to pay an amount into a scheme or to the Pension Protection Fund (see BIM46065) to make good under-funding.

Contribution Notice served on employer:

Under FA04/S199 (2) the payment by the employer is treated as a normal pension contribution under the scheme. The payment of a pension contribution is part of the normal costs of employing staff. Where the undertaking to provide a pension was given to the employees as part of their employment package, then the costs were incurred for the purpose of running the business. This is not affected by the fact that the need to make the payment was crystallised by the actions of the Pensions Regulator.

If the Pensions Regulator requires the employer to make a payment after the trade has ceased, then the payment is treated as being made on the last day of trading [FA04/S199 (4)].

Contribution Notices to third parties:

A contribution notice can also be issued to a person who is party to the act or failure and is a person connected or associated with the employer. This will include parties who knowingly assist in the act or failure. A contribution notice may be issued to one or more persons.

The Pensions Regulator can only issue a notice if it considers it is reasonable to make the person pay the amount in the notice.

FA04/S199 does not apply to the payments made by parties other than the employer. Whether a deduction is allowed in computing the trading profits of such a third party depends on the general principles as to whether the payments are revenue expenditure which is being laid out wholly and exclusively for the purposes of the trade being carried on by the third party.

Whether relief is available for payments by third parties will depend upon the facts of the individual case. You will need to establish why the Pensions Regulator issued that notice.

Notices may be issued to a parent or group company. Guidance on establishing the purpose of a company can be found at BIM38210.

BIM46065: Specific Deductions: Registered Pension Schemes: Pension Protection Fund:

Part 2 of PA 2004 introduced the Pension Protection Fund (PPF), and a Fraud Protection Fund, funded by levies on schemes eligible for protection. For further details on these see the Registered Pension Scheme Manual, RPSM05102050.

The payment to cover the PPF levy is an everyday cost of employing staff, in the same way as the pension contribution itself and will usually be an allowable deduction in computing the employer's trading profits for tax purposes.