Stand-out Q – employer pension contributions…
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What happens if a company makes an employer pension contributions when it doesn’t have profits to cover it?
When a company makes a pension contribution for an employee, this is treated as a trading deduction. Whether this can be deducted for corporation tax purposes depends upon whether it is wholly and exclusively for the purposes of the trade.
Particular care should be taken if the employee is a director of the company or is also a shareholder, and in particular where the contribution is relatively large. HMRC’s manual discusses non-trading purposes in more detail. If there is any doubt, it may be helpful to speak to the company accountant in the first instance to seek their views on whether the company’s tax inspector will be likely to accept the level of the contribution as being wholly and exclusively for the purposes of the trade.
If the contribution fulfils the wholly and exclusively test, it can be deducted when calculating a company’s profits. The contribution could be large enough to eliminate all profits and even generate a trading loss.
Trading losses can be relieved in several ways.
The first relief is given to other profits, such as profits under the loan relationship rules, generated in the current year. The company may also have incurred a capital gain in the current year which will be liable to corporation tax. The capital gain and trading loss can be netted off against each other to reduce the corporation tax liability due on the chargeable gain in the current year.
Where the company is the member of a qualifying group, it may be possible to claim trading loss relief against the profits of other companies within the group.
Where trading losses cannot be relieved in full in the current year, they can be carried backwards to relieve against profits from the same trade in the previous twelve month period. It is also possible to carry the losses forwards indefinitely to set off against future profits but, again, the profits must have been generated by the same trade.
Again, we recommend that you speak to the company accountant to discuss the most beneficial method of claiming relief.
Additional rules apply when a company starts or terminates a trade. These are outwith the scope of this answer.
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