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HMRC internal manual

Business Income Manual

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Specific deductions: pension schemes: wholly & exclusively: payments made pursuant to S75 Pensions Act 1995

S199 Finance Act 2004, S75 Pensions Act 1995

When an employer ceases to take part in a single or multi-employer defined benefit pension scheme, then that employer will become liable to make an additional payment into the pension scheme as a result of S75 Pensions Act 1995 or, in Northern Ireland, the Pensions (Northern Ireland) Order 1995, SI 1995 No 3213) (NI22), Article 75. This liability is commonly known as a ‘S75 debt’.

A payment made by an employer or former employer in order to meet a S75 debt is treated as a normal pension contribution under the scheme. The fact that a contribution is required under S75 does not in itself directly determine the question of whether the contribution was wholly and exclusively for the purposes of the payer’s trade. Nor does it affect the timing of any deduction, unless the employer’s contribution is made after cessation of the employer’s trade.

The payment of a pension contribution is part of the normal costs of employing staff. In practice you can accept that payments made to satisfy ‘debts’, which are the liability of the contributor, are made wholly and exclusively for the purposes of the trade.

S75 requires the employer to make a payment based upon a ‘buyout basis’. This is the amount that it would cost to buy annuity policies to provide the benefits. Alternatively, the employer can make an agreement with the trustees of the pension scheme, subject to the approval of the Pensions Regulator, under which a lower amount than the S75 debt is required to be paid into the pension scheme. The remaining balance, being the difference between the minimum funding level and the S75 debt, may be deferred or it may be paid or guaranteed by another party. These arrangements are commonly referred to as approved withdrawal arrangements (see below).

S75 debts paid after cessation of trading

Where an employer, who has ceased trading, has to make a payment into a registered pension scheme to satisfy a S75 debt that payment is deductible in arriving at the profits for the final period of trading. Such a payment is treated as being made on the last day of trading.

Payments made to satisfy a liability under S75, although often triggered by a cessation, are distinct from payments made for the purpose of going out of business.

Approved withdrawal arrangements

An employer can make an agreement with the trustees of the pension scheme and the Pensions Regulator to pay a lower amount than the S75 debt into the pension scheme.

As part of this agreement the employer or another party, to include an associated company, the former parent company or a purchaser, must give a legally binding guarantee that, if called upon by the Pensions Regulator under the terms of the agreement, it will pay the difference between the amount due upon a ‘buyout basis’ as at the date the employer left the scheme and the amount paid. The term ‘guarantee’ in this context may instead mean that the guarantor has actually taken on the liability rather than merely guaranteed it. This is a question of fact rather than terminology.

  • The contribution may be paid or guaranteed by a sponsoring employer of the scheme, such as the former parent, in which case the deductibility of contributions are considered under the normal rules at BIM46005.
  • The Pensions Regulator will not consider the issue of purpose or the nature of the obligations being met or guaranteed through an approved withdrawal agreement. The fact that an agreement has been entered into is not itself determinative of the purpose for entering into that agreement.

Example 1: trade continues

Company A decides to sell one of its trading divisions to unconnected Company B. Company A continues to trade and the sale is not treated as a cessation (see BIM80595). After the sale, Company A is required to pay £5m into the pension scheme under an obligation imposed by S75.

Company A can make a deduction for the sum as the purpose of making the payment was wholly and exclusively that of its existing trade. The company gets relief in the year in which the payment was made as it has not ceased trading.

Example 2: trade ceases

Company A decides to sell all of its trading operations to unconnected Company B. Company A continues as a property business. After the sale, Company A is required to pay £5m into the pension scheme under an obligation imposed by S75.

Company A can make a deduction for the sum as the purpose of making the payment was an obligation entered into wholly and exclusively for its then trade. As it has ceased trading, Company A makes the deduction in the final period of trading.

Example 3: approved withdrawal arrangement

The entire share capital in Company A was being sold to a previously unconnected company. The financial liquidity of Company A was such that it was unable to meet the S75 debt in relation to its pension scheme deficit. The former parent Company B entered into an approved withdrawal arrangement to guarantee £2 million of the pension deficit relating to the liability of Company A, as it wanted to secure the morale of the remaining members of its pension scheme.

At the time the agreement was entered into Company B did so wholly and exclusively for the purposes of its trade. If and when Company B is required to make payment in respect of the guarantee, it will make a deduction for the £2 million during the period in which the contribution was paid.