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Monthly Tax Review by Matthew Hutton MA, CTA (fellow), AIIT, TEP

Matthew Hutton MA, CTA (fellow), AIIT, TEP author and presenter of Monthly Tax Review highlights a recent change of view by HMRC on employer pension contributions for controlling director shareholders and others.

Context

HM Revenue & Custom’s draft guidance in BIM 46025 suggested that HMRC considered that remunerating a director with a substantial pension contribution would not necessarily be for the purposes of the trade and therefore not be allowable for tax purposes. This was then followed up reports that HMRC had reconsidered their view.

Happily this turns out to be the case, as posted on the HMRC website on 31 March 2006.

BIM46025: Specific Deductions: Registered Pension Schemes: Wholly & Exclusively: Controlling directors & shareholders

A pension contribution to a Registered Pension Scheme in respect of any director or employee will be an allowable expense unless there is a non-trade purpose for the payment.

Whether there was a non-trade purpose for the payment will depend upon the facts of the individual case. The case of Samuel Dracup & Sons Ltd v Dakin [1957] 37 TC 377 (see BIM 37745) was decided on its own particular facts. It confirms that, where there is a non-trade purpose for the payment, then the payment is disallowable, but you should not read more into it than that.

In cases where the contribution is part of a remuneration package paid wholly and exclusively for the purposes of the trade, then the contribution is an allowable expense.

One situation where all or part of a contribution may not have been paid wholly and exclusively for the purposes of the trade is where the level of the remuneration package is excessive for the value of the work undertaken by that individual for the employer. In this situation, you should consider whether the amount of the overall remuneration package, not simply the amount of the pension contribution, was paid wholly and exclusively for the purposes of the employer’s trade. General guidance on deductions for remuneration paid to close relatives of directors can be found at BIM 47105.

Where the remuneration package paid in respect of a director, who is also a controlling shareholder, or an employee who is a close relative or friend of the business proprietor or controlling director is comparable with that paid to unconnected employees, you should accept that the contributions are paid wholly and exclusively for the purposes of the trade. When there are no employees whose duties are genuinely comparable with the proprietor or relative, you should follow the general guidance at BIM 47105.

Where the facts show that a definite part or proportion of an expense is not wholly and exclusively laid out or expended for the purposes of the trade, profession, or vocation, only disallow that part or proportion (ITTOIA 2005 s34(2) and the judgement of Lord Reid in Ransom v Higgs [1974] 50 TC 1 at page 82).

(HM Revenue & Customs website)

Matthew Hutton MA, CTA (fellow), AIIT, TEP
June 2006

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