UK: Employer Pension Contributions - Revenue Guidance On Deductibility

The Revenue has published revised guidance on the test for determining whether employer contributions to occupational pension schemes are tax deductible. The guidance is in the Business Income Manual which is available in a new window by clicking here.

Since A-day, employer contributions to an occupational pension scheme are deductible as an expense provided that they are incurred wholly and exclusively for the purposes of the employer's trade or profession. There have been reports of employers encountering difficulties with this provision because of the way this has been interpreted by individual inspectors. The previous regime was much more relaxed.

This test creates no problems in relation to normal contributions by employers in respect of their employees (even former employees) but it was unclear how the test applied to certain other employer payments, for example section 75 debts, approved withdrawal arrangements and payments in respect of orphaned liabilities.

The new guidance is lengthy but broadly confirms the following:

• Section 75 debts paid by the employer to which they relate will usually be deductible;

• Payments by another employer under an approved withdrawal arrangement may be deductible if the purpose of the payment was to protect the paying employer’s reputation or the morale of continuing scheme members;

• Payments in respect of orphan liabilities relating to a company which has ceased participating in the scheme would normally be deductible as the purpose would be to protect the paying employer’s reputation and the obligation to pay arises from the decision to participate in the scheme (more care is needed if there is an allocation relating to the past service of active members);

• Where the Pensions Regulator issues a contribution notice requiring a company connected with an employer to make a contribution to the scheme (e.g. a parent company), the full facts of the case will need to be considered and that contribution may not be tax deductible;

• On a corporate transaction where a company participating in a group scheme is being sold, arrangements made for the parent company to meet any section 75 exit debt will need to be carefully considered to determine whether their purpose is to secure a better price for the subsidiary’s shares (not deductible) rather than to preserve the parent company’s reputation or member morale (deductible);

• No specific reference is made to the apportionment of section 75 debts but it seems that the same principles relating to withdrawal arrangements should apply;

• The above provisions apply where contributions are being paid by a participating employer. Where it is proposed that third parties make payments into a scheme there are more complex considerations.

In each case, whether or not a contribution is a tax deductible expense will depend on the exact facts of the case and employers in any doubt should seek advice. The good news is that the guidance encourages a constructive approach in line with the general Government policy that strategies to deal with scheme deficits are to be welcomed.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 13/02/2007.