Carrying back losses caused by employer's pension contribution

[tbon]

Hi All,

I'm a software engineer contractor and the sole director of a limited company to run this business. The company pays me a salary and pension contribution as part of my remuneration. Last year (ending December 2021) the company made profits of about £5000, paid its corporation tax and still ended up with some reserves in the bank. This year (ending December 2022) the company will make losses of about £2000 after paying my usual salary and pension contribution which was partly covered from previous reserves.

My accountant is reluctant to carry these losses back against last year's profit (or even forward to next year), claiming that it was caused by pension contribution, therefore not considered ‘genuine trading losses’, and these are not carried either back or forward, and cannot offset the corporation tax liability of a profitable year.

They cannot support this position with any actual guidance from HMRC, but claim that their advice comes from experience that HMRC can successfully challenge the validity of carrying losses back/forward in similar situations.

I'm no means a tax expert but highly unconvinced by their reasoning. I'm wondering if anybody here has any relevant experience with HMRC or advice on which route to take?

Thank you,
-Tamás

 

[WaveJumper]

I am no expert but like you a bit unconvinced by your accountants reluctance to carry back or forward there are plenty of accountants residing on the forum so will be very interesting to see what they think about this.

 

[Gyumri]

I think your accountant must be right that a pension contribution can hardly be described as a trading loss otherwise we would all be ploughing our profits into pensions. It can't be a deductible trading expense unless HMRC has lost their marbles (which is possible).

 

[NicoJ]

If the level of salary and pensions is commensurate with the level of work then the contribution is allowable and losses can be carried back. If your accountant is advising that they can't do this then they clearly belive the pension payment is excessive in relation to the company and is therefore not wholly, necessarily & exclusively for business.

BIM46035 - Specific deductions: pension schemes: wholly & exclusively - controlling directors & shareholders - HMRC internal manual - GOV.UK

www.gov.uk

 

[tbon]

If the level of salary and pensions is commensurate with the level of work then ...

The amounts paid out by the company is not outstanding in any way compared to last years. Actually, smaller than last years, because the turnover was smaller. Of course, my accountant is aware of this as they have all the information available. I just think they first priority is to cover themselves and saving money for the client comes only second.

 

[NicoJ]

The amounts paid out by the company is not outstanding in any way compared to last years. Actually, smaller than last years, because the turnover was smaller. Of course, my accountant is aware of this as they have all the information available. I just think they first priority is to cover themselves and saving money for the client comes only second.

I can't comment on the motives of your accountant but if you don't trust them it may be worth looking elsewhere?

 

[macScot]

This information is from the peoples pension website:

What is the maximum employer’s contribution?​

There’s no maximum employer contribution – employers can pay any amount of pension contributions for their employees. If employers choose to meet the total minimum pension contribution required by law, the employee doesn’t need to contribute (but they can if they want to).
Remember, employer contributions still count towards the employee’s annual allowance.
To increase your pension contribution for an employee, set up a new worker group with higher employer contribution amounts. Make sure this is also changed in your payroll software.

Tax relief on employer contributions
Employer pension contributions are paid gross and put through the business’ account as an expense. This is then deducted from profits before they’re assessed for either corporation tax (companies) or income tax (self-employed or partners).
Tax relief isn’t automatic and it’s up to the employer’s local inspector of taxes whether the employer receives tax relief on the whole contribution. To qualify for tax relief as an expense, pension contributions must be made wholly and exclusively for the purposes of the business.
HMRC guidance highlights pension contributions generally pass the ‘wholly and exclusively test’ and qualify for tax relief. But if there’s a clear non-trade purpose, tax relief may be restricted or not allowed.
This is a complex subject and more details can be found on the Government’s website.

 

[Paul Kelly ICHYB]

otherwise we would all be ploughing our profits into pensions

Isn't that an excellent financial move?

 

[Gyumri]

That's a question for HMRC when he comes to find out that the company's profits have all been hived off into personal pensions for the directors or employees.

While there is notionally no cap on pension contributions they cease to be an allowable expense if they are not deemed to be a proper trading expense.

@NicoJ has given a useful link above.

 

[tbon]

While there is notionally no cap on pension contributions they cease to be an allowable expense if they are not deemed to be a proper trading expense.

Could you be more specific about what would not count as proper trading expense in your opinion? I would think pension contribution is part of the director's remuneration and it is trading expense just as much as the salary. Remember my question is about a one person limited company, so concerns about excessiveness and W&E must be in this context.

As for the cap, the annual £40k/person is there, so it's not unlimited. But, yes, it is a tax efficient way to get your earnings out of the company, and I see no problem with utilising it as allowed by the relevant rules.

 

[Gyumri]

The cap of 40k you are referring to is the amount for which you can obtain tax relief but there is no cap on the amount you can pay into your pension pot.

Your question is about carrying back the "loss" your company made this year to reclaim corporation tax that your company paid on its profits last year. Your accountant says that that can't be done because the loss which you have made this year is in a way artificial Because the pension contribution you have made cannot really be regarded as a bonafide trading expense. Your accountant may be a former HMRC inspector, I don't know, but he's obviously not on your side. Whether he is right or not remains to be seen.

Making the most of tax losses - Newby Castleman

This means that in accounting terms, and possibly in terms of cash, there will be many businesses currently operating at a loss.

www.newbycastleman.co.uk

 

[NicoJ]

Could you be more specific about what would not count as proper trading expense in your opinion? I would think pension contribution is part of the director's remuneration and it is trading expense just as much as the salary. Remember my question is about a one person limited company, so concerns about excessiveness and W&E must be in this context.

As for the cap, the annual £40k/person is there, so it's not unlimited. But, yes, it is a tax efficient way to get your earnings out of the company, and I see no problem with utilising it as allowed by the relevant rules.

Would you pay an unconnected individual the amount that you've paid (salary & pension) to manage your business? That is the argument that HMRC would use to disallow the pension contribution.

It does seem odd to me that there's been no issue until the pension created a loss, are you sure it was allowed in the previous years or has it only come to light due to the loss? If it has been allowed previously and it is relatively comparable to prior years then it does seem strange.

 

[NicoJ]

£40k is the amount that an individual can contribute to their pension (or 100% of their salary, whichever is lower).

There is no limit to how much an employer can pay (the company here is the employer), but there is a lifetime allowance. Exceeding that allowance (i think its £1m but thats off the top of my head) attracts a tax charge.

 

[WaveJumper]

£40k is the amount that an individual can contribute to their pension (or 100% of their salary, whichever is lower).

There is no limit to how much an employer can pay (the company here is the employer), but there is a lifetime allowance. Exceeding that allowance (i think its £1m but thats off the top of my head) attracts a tax charge.

I think your correct last time I looked the figure was £1,073,100

 

[tbon]

Would you pay an unconnected individual the amount that you've paid (salary & pension) to manage your business? That is the argument that HMRC would use to disallow the pension contribution.

This is an interesting one, thanks for mentioning. As my business is for selling my software skills, it probably wouldn't even exist if I couldn't do it myself. But the salary and pension contribution together is very modest, and I would have to pay at least this much to employ someone else.

It does seem odd to me that there's been no issue until the pension created a loss, are you sure it was allowed in the previous years or has it only come to light due to the loss? If it has been allowed previously and it is relatively comparable to prior years then it does seem strange.

My accountant's problem is that the pension contribution took the company to losses this year, i.e. it wasn't paid from this year's profit. (It was paid from last year's retained profit.) Nevertheless, I don't know how they can tell if the cause of the loss was my pension contribution or their accountancy fee. ;-)

 

[PCD]

As you suggest that your total remuneration (salary plus pension contribution) is modest I would see no reason to restrict the claim for the pension contribution as an expense. If it creates a loss so be it and a claim for loss relief should be considered. Probably carry back against the previous year but carry forward might have advantages. Presumably the full pension contribution is included in the accounts and then your accountant has disallowed part or all of it in the tax computation? Or reporting a loss on the tax computation but doing nothing with it? Either is a bit odd.

 

[NicoJ]

My accountant's problem is that the pension contribution took the company to losses this year, i.e. it wasn't paid from this year's profit. (It was paid from last year's retained profit.) Nevertheless, I don't know how they can tell if the cause of the loss was my pension contribution or their accountancy fee. ;-)

If they have claimed tax relief previously on the pension contribution then I don't see how the company making a loss should colour their view. If it was a consistent situation where losses were continually being made due to massive pension contributions then it would be a different situation.

You don't have to accept their view on the matter, but you may find that they refuse to file on your behalf.

 

[tbon]

I hope you don't mind me rewarming this earlier thread. As the above mentioned annual accounts are finished, my accountant gave me a bit more explanation. I wonder what you guys think. This is what they wrote:

The pension contributions are not treated any differently than that of salary, the pension and salary payments form part of your remuneration package from the company as a director. If the remuneration package that is in place causes the company to made a trading loss during the period, this is something that we advise you review as it then potentially falls foul of HMRC’s “wholly and exclusively” rules.

Where the remuneration package is to an unconnected party, it is unlikely to fall under scrutiny if a loss is caused by the company – however, any company expenditure to a connected or controlling party, by nature, will come under more scrutiny with HMRC due to the conflict of interest.

If you are happy to justify that the remuneration package during the year is one that you would have paid to an unconnected party, i.e. that it is not excessive for the circumstances of the company and the work done, then we will proceed on this basis.

 

[UK Contractor Accountant]

Yep that's what I would have done - claimed it as tax deductible and put client on warning maybe challenged by HMRC if regarded as excessive.

 

[tbon]

What do you think is the best approach to "justify" that?

 

[Daybooks]

What do you think is the best approach to "justify" that?

To link the eligibility of allowable expenditure for corporation tax purposes to that of whether it results in an overall loss would be somewhat fraught with complications. It would only become ineligible if it were proven that the there was no intention of carrying on a trade or that the expenditure was clearly not for business purposes - all under normal principles.

Why single out pension contributions in this scenario? Which of course you alluded to with your comment about their fee.

Bear in mind that employer pension contributions are usually allowable for corporation tax purposes when paid - which might put a new perspective to it.

A remuneration package to an unconnected third party that included a payment to an approved pension scheme might raise interest regardless of the profitability of the trading company; perhaps not the best comparison.

If you are happy with the expenditure being wholly and exclusively business then just tell your accountant that; thank them for raising any concerns and ask them to confirm that they will now proceed. You and only you need to give your justification if and when challenged. It does seem like some unnecessary hard work going on here.