Employer pension contributions resulting in loss this year

[DRJ]

I wish I knew about this forum a few years ago - I am totally new to the forum so apologies if I have got a few things wrong here...

I have been a little passive and assumed my accountants were on the ball with their advice. I have asked multiple questions and am only now realising they may not have given me the best advice. I clearly should have acted sooner... I would really welcome your advice as I think I need to (or would like to) act pretty quickly.

Quick summary. I have had a limited company since April 2014. This year I have not picked up a contract since July due to a number of factors (though I have been actively looking and had quite a few roles fall through). My accountant has told me I should not be collecting a salary from my limited company as I have not been engaged on a contract. And I certainly should not take a salary in April 2017. I can't find anywhere that supports this position - or am I missing something?

My company has made an employer pension contribution (£40K) to my SIPP this year. This has taken me to a small loss (taking in to account salary and dividends this year).

I have plenty of retained profit to cover everything I am talking about here.

In addition I wish to make use of the employer pension contribution (to my SIPP which has been in place long before my limited company was set up) carry forward from previous years - when I was made a profit which will cover the contribution. My account has told me I cannot do this as it will create a loss and HMRC will not allow it: 'Pension contribution cannot create a loss for your company. As you are contributing to the personal pension fund through your company and your company does not have income therefore it will create a loss. Therefore it is very likely that HMRC may disallow the pension contribution expenses and charge corporation tax.'

I have no issue paying the appropriate tax (haven't I already paid corporation tax on the retained profit?). However is it also possible to carry back a trading loss to the year when the pension contribution is carried forward from?

I have asked these questions of my accountant and have radio silence (interspersed with unhelpful/ rude emails). I am also considering the future of my limited company. I would like to focus on a self employed activity (totally unrelated to the contracting work) for six months or so this year so I need to look at closing or making my limited company dormant (not with Companies House but with HMRC). Needless to say whatever I do I want to make sure all the liabilities etc. are covered - AND I will be changing accountants (or doing it myself!).

Thank you in advance for your advice!!!!

[chopper]

Have you asked your accountant...?

Oh... Sounds like terrible advice. If your LtdCo has the retained earnings, then of course it can pay you a salary, and make employer contributions into your SIPP and even issue dividends and it can make a loss in the process and get some of its past Corporation Tax returned.

But only if it has the retained earnings to support those actions. (In fact, it only needs the retained earnings to support dividends, otherwise the divis would become illegal).

Otherwise what would be the point of stashing a warchest away if you're not allowed to touch it when out of contract?

I recommend changing accountant to a contractor specialist. Or in fact, to any other non-incompetent accountant.

[SueEllen]

As already said your accountant is talking tulip.

Find a new accountant asap.

[DRJ]

I am in the process of deciding what to do with my limited company but will not be continuing with the current accountants... Who claim to be contractor specialists :-(

I knew he was talking nonsense about the employer pension contributions - it makes no sense.

I have also never heard anyone every say you have to have active contracts/ be working in order to take a salary either. Unless I really am in a bubble...

I want to act pretty quickly on this too - searching gov.uk websites and it does say that when losses are incurred they can be carried forward/ back. Has anyone done this with losses incurred via employer pension contribution carry forward?

Many thanks...

[WordIsBond]

Is your accountant part of any recognised body of accountants?

The part about corporation tax doesn't make much sense to me. It makes me wonder if something got lost in translation.

I would ask very specifically this:
1. Does the company have retained profits from prior years?
2. Is there any reason that a company which has retained profits cannot use them to pay a salary to an employee or office holder even if they are not bringing in funds in the current year?
3. Is there any reason that a company which has retained profits cannot use them to make a pension contribution on behalf of an employee or office holder?
4. If the use of retained profits for #2 or 3 generates a loss for the company in the current year, is there any reason that loss cannot be carried back to offset profits from the prior year or carried forward to offset future profits, and thus save on corporation tax?

I believe that if the answer to #1 is yes, the answers to the remaining questions should be no. (Maybe one of our friendly accountants who contributes here could confirm that.) If those aren't the answers, you may need a new accountant very quickly who knows what they are doing. I'd put a time limit on it, like please let me know by the end of tomorrow. Tax year is winding down, you have to move on this.

I think you can only carry back losses one year, so if there was no profit in the prior year, you'd have to carry the loss forward to offset next year's profits -- and if you don't get a contract next year, then it would have to be carried forward again. If you can carry the loss back, you should be able to reclaim corporation tax paid for last year.

I'm assuming your company's tax year is April to April. Unless your companies tax year ends 5 April exactly, I believe you could actually make two £40K pension contributions during your company's tax year, as long as one is before and one after 5 April. The annual pension limit is based on the personal tax year, not your company's tax year. Presumably a knowledgeable accountant could answer this for you, and it may not make sense anyway. But if it did make sense, you certainly should get advice from someone qualified, which I'm not.

[DRJ]

Thank you so much. That is really helpful.

I have asked pretty clear questions of the accountant but get statements back that make no sense. I have asked to be allocated someone else in the firm today and will ask those very clear questions.

[adubya]

Doh... get back statements that make no sense...

There is an edit button to change your previous posts.

[Maslins]

Your accountant's advice does sound a bit concrete. There are some who would agree HMRC might seek to disallow these things based on arguments of either:
1) that if there's been no work for a while the company has ceased trading, hence losses couldn't be offset against profits from a previous trade. I've never seen HMRC attack from this angle, every business has occasional blips in income, doesn't mean they've stopped trading.
2) that the payments are excessive and hence potentially not wholly and exclusively for the benefit of the trade. Again I've never seen HMRC attack from this angle either, and assuming you've been responsible for the historic build up of profits, I don't see how they could (I think where it might be used is more where a non-working spouse was paid £50k salary and £40k pension).

Under normal trading circumstances you can only carry back the loss one year. Therefore if you're talking about putting £££s into a pension (including previous year's unused allowances) then do sanity check the prior year had enough profit for it to be offset. Also I'd recommend when putting that amount in that you sanity check with an IFA to ensure you haven't misunderstood pension carry forward rules. If you're putting in (say) £100k, worth paying a few hundred quid to ensure you haven't made a big mistake.

Another option if you've got a redundant company with lots of cash would be to look at an MVL. It won't help your pension pot, but will get the company's cash into your personal hands now, fairly tax efficiently.

[craigy1874]

Is your accountant part of any recognised body of accountants?

The part about corporation tax doesn't make much sense to me. It makes me wonder if something got lost in translation.

I would ask very specifically this:
1. Does the company have retained profits from prior years?
2. Is there any reason that a company which has retained profits cannot use them to pay a salary to an employee or office holder even if they are not bringing in funds in the current year?
3. Is there any reason that a company which has retained profits cannot use them to make a pension contribution on behalf of an employee or office holder?
4. If the use of retained profits for #2 or 3 generates a loss for the company in the current year, is there any reason that loss cannot be carried back to offset profits from the prior year or carried forward to offset future profits, and thus save on corporation tax?

I believe that if the answer to #1 is yes, the answers to the remaining questions should be no. (Maybe one of our friendly accountants who contributes here could confirm that.) If those aren't the answers, you may need a new accountant very quickly who knows what they are doing. I'd put a time limit on it, like please let me know by the end of tomorrow. Tax year is winding down, you have to move on this.

I think you can only carry back losses one year, so if there was no profit in the prior year, you'd have to carry the loss forward to offset next year's profits -- and if you don't get a contract next year, then it would have to be carried forward again. If you can carry the loss back, you should be able to reclaim corporation tax paid for last year.

I'm assuming your company's tax year is April to April. Unless your companies tax year ends 5 April exactly, I believe you could actually make two £40K pension contributions during your company's tax year, as long as one is before and one after 5 April. The annual pension limit is based on the personal tax year, not your company's tax year. Presumably a knowledgeable accountant could answer this for you, and it may not make sense anyway. But if it did make sense, you certainly should get advice from someone qualified, which I'm not.

As an accountant (well tax advisor) I would agree with wordisbond, but would qualify the answer to part 4 by saying that the loss has to be incurred in a trading period. I would argue that just because you don't have turnover, doesn't mean it isn't a trading period. Things like attending interviews etc. would be enough (in my view) to contend the company was trading.

So if the company made a pension contribution in a period where there was no income, but you were happy the company was still classed as trading, I see no reason why you couldn't create a loss and then carry that loss back to an earlier period to obtain some CT relief.

[DRJ]

Thank you for your help with this.

I have had a long conversation with my accountants supervisor just now who tells me
-Because the employer pension contribution this year has created a (£20k) loss this year HMRC may view the contribution as excessive and investigate
-If I make an employer pension contribution using carry forward (I have enough retained profit to do this - and had I been aware I could do this would have made the pension contribution that year) this FY and claim the corporation tax back (for the previous year) HMRC will view this as excessive and investigate before refunding the corporation tax and may disallow the contribution.

I intend to pick up a contract in the short term and have no doubt I will cover the losses carried forward quickly but the accountant has made me nervous now...