The next step

On the temporary rules

[Further Information]

Claiming CT relief on pension contributions

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Backwards or forwards loss relief?

Company pension contributions

We previously answered a question from one of our subscribers about whether his company was entitled to claim corporation tax (CT) relief for pension contributions it made for him ( yr.22, iss.8, pg.4 , see The next step ). He has now asked a follow-up question about CT loss relief.

HMRC will only challenge CT relief for pension contributions if there is a non-business reason for paying them. It says that where a “controlling director is also the person whose work generates the company’s income, then the level of the remuneration package (including pension contributions) is a commercial decision and it is unlikely that there will be a non-business purpose” . Trap. HMRC might take the view that if a pension contribution results in the company making a loss the remuneration package is not commercial and so will argue that CT relief is not due for some or all of the contributions.

Commercial or not commercial

HMRC’s approach isn’t unreasonable, but before rejecting a claim for CT relief for contributions because they create or increase a loss, it must consider whether the director’s remuneration as a whole (including the contributions) is fair for the work they perform for their company. Tip. If the rate of remuneration is comparable with others doing a similar job, HMRC has no reasonable grounds to refuse a claim for CT relief whether or not the company makes a loss.

Claiming relief for the loss

Where CT relief is allowed for pension contributions, relief for any resulting loss is also allowed. There are different ways for a company to claim loss relief. It can use it to reduce its CT bills for:

• the previous financial year
• the previous three financial years under the temporary rules (see The next step ); or
• its future profits.

Which loss relief is most tax efficient?

There’s no one answer; the rates of tax on profits past and future must be considered. Example.  Acom Ltd’s financial year ends on 31 March. Its profits for 2019, 2020 and 2021 were £55,000, £60,000 and £3,000 respectively on which it paid CT at 19%. Its projected loss for 2022 is £40,000. As the loss was entirely caused by a large one-off pension contribution, the company expects to make profits in 2023 and later years. Depending on the level of profits the rate of CT will be between 19% and 25%. So, Acom can guarantee CT relief at 19% for losses under the current rules if they are used against past profits. This would generate a CT refund of £7,600 (£40,000 x 19%). It might be able to reduce its future CT bills by up to £10,000 (£40,000 at 25%), but only if its profits are £200,000 or more in 2023. If they return to 2019 levels, the CT relief would only be slightly greater than the £7,600 it could get if it claimed relief against past profits. Tip.   Claiming CT relief for the 2022 loss now using the temporary rules is probably Acom’s best bet as it’s unlikely to obtain much more relief by using the loss against future profits. It has until 31 March 2024, but in doing so it delays when it can get its hands on the refund.

For a previous article about claiming CT relief on pension contributions and information on the temporary rules, visit https://www.tips-and-advice.co.uk , Download Zone, year 22, issue 9.