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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Specific deductions: pension schemes: wholly & exclusively: multi-employer schemes: reputation of the business and the morale of continuing scheme members

S34 Income Tax (Trading and Other Income) Act 2005, S54 Corporation Tax Act 2009


Previous pages of this guidance have considered the specific and unique issues to be aware of in considering how the wholly and exclusively principle applies to pension contributions met or guaranteed by one company on behalf of another, either by another sponsoring employer of a multi-employer scheme or by an unrelated third party.

The damage for a company seen to be abandoning pensioners related to it or its associates can be immeasurably greater than for a company failing to pay off a supplier or a landlord, both in terms of its public face and the morale of its employees. In almost all cases this will be the sole trade purpose behind one company paying a contribution towards an underfunded pension scheme liability of another company and a deduction will be due.

The following summarises the specific guidance contained in previous pages, to draw attention to those areas where the reputation of the payer’s trade or the morale of its staff is not the sole purpose of the contribution and no inter-company recharge has been made.

There are no legal precedents in the context of the weight to be attached to the reputation purpose behind a pension contribution. Certain specific situations will give rise to a degree of uncertainty as to whether the payment of another trade’s liability is wholly and exclusively for the paying company’s trade. Such cases will be rare, but will require further facts to be established.

General guidance on whether payments or guarantees by one company on behalf of another are considered as wholly and exclusively for the purposes of the trade of the paying company is at BIM38250.

Contributions made by a third party who is not a sponsoring employer of a scheme do not come within the special rules for deduction of pension contributions by employers. Specific guidance is at BIM46070; however the following may equally be relevant to the question of purpose.

Establish the facts

Expenditure incurred by a company wholly and exclusively for the purposes of its trade is allowable, notwithstanding that a benefit may accrue to a third party (including a fellow group member or associated company). The purpose is essentially a question of fact. The evidence of the directors as to purpose will be important but you should bear in mind Walton J’s remarks in Garforth v Tankard Carpets [1980] 53TC342 mentioned at BIM37065 which underlines in cases of doubt the importance of fully establishing all the relevant facts.

Reputation of the business and staff morale

Firstly, it should be remembered that the involvement or otherwise of the Pensions Regulator is not determinative of purpose. However the circumstances of involvement will often be worth establishing fully as a means of understanding the background to the contribution.

A company will often cite reputation or morale as the sole purpose behind its decision to make a contribution towards a pension liability attaching to another company. However where the company with the liability was in a position to meet the liability from its own resources then the reputation of another contributor is less likely to be the sole purpose behind their payment.

Equally, the fact that one company made or guaranteed a pension liability for another company at the time of sale of that company means that the sole purpose can often be to protect the reputation of the payer’s trade. This will be a question of fact in each case.

Genuine orphan liabilities are by their nature historically and intrinsically attached to the pension scheme as a whole. A decision by one company to contribute towards the orphan liability of another in the normal course will usually be solely for the purposes of its trade. However the reputation and morale purpose behind making a contribution towards current employees and scheme members of another trade is considerably weaker. In such cases a deduction is not assured.

The following examples are provided as further illustration of the factors which may need to be considered when one company guarantees or meets the pension liability of another. The approach is not intended to be prescriptive and reference should always be made to the facts of the case and the various factors set out in this guidance.

Example 1

Company A decided, solely in the interests of its trade, to take part in a group registered pension scheme. As part of the scheme, Company A gave a cross guarantee in respect of other members. Some years later, Company A is called upon to make contributions under the guarantee as another member of the group has gone into liquidation.

Company A can make a deduction for the sum as the purpose of making the payment was wholly and exclusively that of its trade. Company A chose to enter the scheme and to give the required guarantee wholly and exclusively for the purposes of its trade.

Example 2

Company B decides to sell one of its trading subsidiaries to an unconnected party. The trading subsidiary operated a registered pension scheme for its employees, which was fully funded at the time of sale. Three years after the sale, the former subsidiary ceases trading and it is found that the registered pension scheme is underfunded. Company B has no legal obligations to the registered pension scheme but decides to pay an additional £5 million into the registered pension scheme because it is concerned that it could be damaged by the bad publicity arising from the collapse.

In this case Company B can make a deduction for the payment in computing its trading profits as the facts show that it was made for the sole purpose of protecting its reputation.

Example 3

Company C is parent of a large group. Following actuarial advice it decided to address an £80 million pension deficit, relating to the group’s orphan employees. Recent financial press articles had been highlighting the issue and Company C wished to protect its reputation and reassure its current staff. For historical reasons one trading subsidiary carried a disproportionate level of this pension deficit, totalling £35 million, but was not in a financial position to meet this liability. Agreement was reached with the pension scheme trustees whereby the £35 million deficit was reallocated to and paid by Company C.

It is notable that the liabilities being reallocated relate to historical orphan employee liabilities, rather than any underfunding on the part of the subsidiary, in respect of its own former and current employees. Company C made the payment for the purposes of its trade, in wishing to protect its public image and reassure current employees and can make a deduction.

Example 4

Company D decides to sell one of its trading subsidiaries. At the time this decision was taken it was also agreed with the pension trustees that the potential liabilities under S75 Pensions Act 1995 (see BIM46045), attaching to the subsidiary in respect of orphan employees, would be reallocated to Company D, who then made a payment of £2 million into the pension scheme prior to the sale of the subsidiary.

Whether Company D decided to meet the pension liability of its subsidiary for the purposes of its own trade is a question of fact. If Company D decided to meet the orphan liability of the subsidiary solely to protect its reputation as an employer, when the subsidiary was not in a position to fund the deficit itself, then relief will be due. The fact that the liability relates to orphan liabilities rather than the pension liabilities relating to current employees of the subsidiary would normally support the reputation purpose.

However if the subsidiary was in a position to fund its own pension deficit and instead Company D took on this liability to increase consideration for the sale of shares in the subsidiary then no deduction will be due as the £2 million was not paid wholly and exclusively for the purposes of the trade of Company D.

Alternatively, if the subsidiary had itself made the £2 million payment, it would have done so wholly and exclusively for the purposes of its own trade and been due a deduction of £2 million.