Reply to: Employer pension contributions resulting in loss this year

[craigy1874]

What do you mean by "whole period in which the contribution was made". Do you mean the whole trading year ie you can't pay any pension in the trading year in which you cease trading?

I move into a new financial year in June. I intend to make a pension contribution and then empty the coffers via dividends. Then close the company. Are you saying I need to keep the company in place until the end of the financial year?

No, sorry if it wasn't clear.

Your current accounting period is obviously May 2017. How long after that will you continue to trade?

If, for example, you continue trading until the end of June, or July - my advice would be to extend your May accounting to June or July and deal with the final period of account in one go.

This will only work if you haven't extended your accounting period already in the last 5 years.

My initial point was that if, in a 12-month period, the company couldn't demonstrate that it traded for the full year, there is scope for HMRC to argue the pension contribution was made in a non-trading period and isn't therefore an allowable deduction for corporation tax, the same as any other expenses incurred in a non-trade period.

[Cirrus]

b) was the company trading for the whole period in which the contribution was made

What do you mean by "whole period in which the contribution was made". Do you mean the whole trading year ie you can't pay any pension in the trading year in which you cease trading?

I move into a new financial year in June. I intend to make a pension contribution and then empty the coffers via dividends. Then close the company. Are you saying I need to keep the company in place until the end of the financial year?

[DRJ]

Thank you all - that is very helpful. I'm changing accountants asap but just had to make sure I was doing the right thing before the end of the FY (for stress levels, my business and finances).

Mucho gracias!

[craigy1874]

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...

I do agree that HMRC MAY ask a question or two about the contribution, but even that is a long shot.

If they do, how about this for your argument - I decided, as company director, that I would like to pay myself a bonus this year. However, instead of receiving this in the form of cash, I asked the company to make a special one-off payment to my pension scheme. The bonus was paid as a result of my efforts in the previous accounting year when I won the company various contracts which resulted in a substantial turnover.

It is not up to HMRC to decide if the contribution was a good commercial decision or not, i.e. that it made the company the loss.

As I said earlier, the only challenges they would have are:

a) was the pension contribution wholly and exclusively for the purposes of the trade (I would suggest my argument above proves the answer is yes.
b) was the company trading for the whole period in which the contribution was made (I covered this earlier and you would have to be comfortable arguing this point)

If you can convince HMRC on both of these points, you will be able to create the loss and carry it back.

I must say that being told it is as simple as 'a pension contribution cannot create a loss' is total bollocks.

Hope this helps.

[DRJ]

There is enough of a warchest to pay a salary. I'm not trying to get myself in trouble

[LondonManc]

Ok so following good advice here and my own nervousness...

I will probably just make the full annual allowance contribution to my SIPP (from employer contributions) this FY. I will carry the loss back to last year (where there was more than enough profit to cover).

Does that sounds sensible?

If you're without a contract, I wouldn't be dumping into your SIPP if you've not got a considerable warchest to keep paying salary from.

[DRJ]

Ok so following good advice here and my own nervousness...

I will probably just make the full annual allowance contribution to my SIPP (from employer contributions) this FY. I will carry the loss back to last year (where there was more than enough profit to cover).

Does that sounds sensible?

[LondonManc]

The one piece that your accountant has got right is that you cannot take dividends if there are no profits to declare them from. Absolutely nothing to stop you paying a salary if there's money in the corporate account to pay it from.

[northernladuk]

There is an article mention excessive contributions here but scanning through it's not really going to help I don't think.

[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...

[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.

[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.

[adubya]

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

There is an edit button to change your previous posts.

[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.

[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.