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HMRC internal manual

Company Taxation Manual

HM Revenue & Customs
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Corporation Tax: management expenses: pension contributions: sale of subsidiary

Where a contribution is paid as the company winds down or sells off its assets (including subsidiaries) or parts of its business then it is a question of fact as to whether the payment is in respect of its investment business, in respect of some other business (e.g. a trade or the business of a subsidiary) or part of the cost of going out of business (see the examples at CTM08347).

Where a company with investment business is selling a subsidiary company it will normally be the case that the company vendor should be able to demonstrate that any contribution it made was in respect of its investment business (CTM08353), see example at CTM08347. The paying company will often view the payment, legitimately, as being for the purpose of its reputation in not wishing to dispose of a company which carries a substantial deficit or to protect the morale of its continuing employees.

Such a sale may create a FA95/S75 debt, a liability in the departing subsidiary see CTM08354. The parent (vendor company) may pay the debt or guarantee it. The facts will show whether or not any payment was made in respect of its investment business and therefore whether relief is available.

Establishing the purpose will require a critical examination of all the documents and the evidence surrounding both the sale and the payment to establish the company’s purpose/intentions at the time the decision to pay the contribution was taken. Where it is clear from the evidence that the contribution was made in respect of the investment business, then the argument should be accepted. Even in less clear cut cases it is important to bear in mind the potential damage to its reputation for a company seen to be failing to fund properly the pensions for pensioners related to it or its group or associates.

Where such a contribution relates to orphan employees, CTM08355, and the subsidiary could not meet any payment from its own resources before the sale, then it is also very likely that the company can demonstrate that the contribution was made in respect of its investment business.

Conversely if the subsidiary could have met the liability itself, or if the liability relates to its (the subsidiary’s) own current employees, then the reasons for a parent meeting the liability would be weakened. The parent’s reasons for making the payment would need to be investigated further as outlined above to establish whether it had paid the contribution in respect of its investment business.