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HMRC internal manual

Business Income Manual

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Specific deductions: pension schemes: wholly and exclusively: payments enforceable by the Pensions Regulator

S199 Finance Act 2004, S38-S42 Pensions Act 2004 (PA 2004)

The payment of a pension contribution is part of the normal costs of employing staff. It is allowable unless, exceptionally, there is an identifiable non-trade purpose for the employer’s decision to make the contribution to a registered scheme (see BIM46030). 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 actual payment was crystallised as a result of a direction issued by the Pensions Regulator.

The Pensions Regulator is a statutory body established by the PA 2004. The statutory objectives of the Pensions Regulator include protecting members’ benefits and reducing calls on the Pension Protection Fund (see BIM46090). Employers are therefore under scrutiny to ensure that they meet their obligations in relation to members of occupational pension schemes, as well as other schemes within the Regulator’s remit. The Pensions Regulator acts as a referee to negotiations between the trustees and employer(s) where an application for clearance to a transaction has been made. In certain cases the Pensions Regulator has the power to issue financial support directions in order to protect the benefits of members where it is deemed reasonable to do so.

The Pensions Regulator can also issue a contribution notice requiring an employer, or a person connected with the employer, to pay an amount into a scheme or to the Pension Protection Fund (see BIM46090) to make good under-funding. This is done if the Pension Regulator is of the reasonable opinion that an act or failure to act has taken place, the main purpose of which was to prevent the recovery of the whole or any part of a liability to the pension scheme under S75 Pensions Act 1995 (commonly known as a ‘S75 debt’ - see BIM46045). If the contribution notice issued by the Pensions Regulator results in the employer making a payment after the trade has ceased, the payment is treated as being made on the last day of trading.

Example 1

Company A enters into a transaction and applies to the Pensions Regulator for clearance. Company A indicates that its pension scheme is underfunded. After negotiations with the trustees have been agreed and duly approved by the Pensions Regulator, Company A agrees to pay £10m into the scheme. Company A borrows £10m from its parent company and pays it into the scheme.

Company A can make a deduction for the sum in the period of payment. It is a payment made wholly and exclusively for the purposes of its trade. The fact that it crystallised as a result of the Pensions Regulator’s involvement does not affect this.

Example 2

Company A enters into a transaction and applies to the Pensions Regulator for clearance. Company A indicates that its pension scheme is underfunded. After negotiations break down, and following a number of deliberate actions by Company A, the Pensions Regulator issues a notice requiring Company A to pay £10m into the scheme. Company A borrows £10m from its parent company and pays it into the scheme.

Company A can make a deduction for the sum in the period of payment. It is a payment made wholly and exclusively for the purposes of its trade. The fact that it crystallised as a result of a notice from the Pensions Regulator does not affect this.

Example 3

The Pensions Regulator advises Company A that its pension scheme is underfunded. Company A continues to trade. After negotiations break down, the Pensions Regulator issues a notice requiring the parent of Company A to pay £10m into the scheme. The parent company pays the £10m in accordance with the notice, no recharge is made to Company A.

The full facts should always be considered. While the reputation of the parent’s trade may as a consequence be preserved, it is unlikely to be the sole purpose of the payment if it arose solely from the actions of the Pensions Regulator following Company A’s refusal to meet the liability. The parent company would not appear to have paid the £10m contribution for the purposes of its own trade, and in the absence of a recharge to Company A, no deduction will be due to either parent company or Company A.