HMRC Further Restricts New Pensions Regime

by Amanda Banks, Tax-News.com, London

02 March 2006

PKF says that new HM Revenue & Customs (HMRC) guidelines encourage tax inspectors to establish whether or not an employee is a ‘close friend’ of the controlling director of a firm before allowing tax relief for pensions contributions made on their behalf.

Under current tax rules, says PKF, it is relatively straightforward for businesses to claim a tax deduction from their profits in respect of pension contributions made for employees. For accounting periods ending after 5 April 2006 (known as 'A'-day) this expense will only be deducted if the business can demonstrate that it is incurred “wholly and exclusively” for a business purpose such as attracting and retaining valued employees.

The proposed rules can be found in draft sections of HMRC’s Business Income Manual that deals with employers’ deductions for pensions contributions paid for employees. They require tax inspectors to establish whether or not a pension contribution is paid for a non-trade purpose, i.e. whether it benefits the employee more that the business.

Peter Penneycard, national director of tax at PKF, said: “This is the latest example of HMRC paring down potential A-day tax advantages before they come into force. Whilst HMRC suspicions are often raised when relatives of the controlling director are employed in a company, how is an inspector supposed to tell which employees are friends of a controlling director? Provided the total cost of the salary package reflects the individual’s value to the company, it should not matter to the company if senior employees choose to be rewarded by means of pension contributions rather than salary.

“If these draft instructions are adopted, the whole area of pension contributions could become a minefield for small companies. At a time when the Treasury is exhorting people to make better provision for their retirement, HMRC should not be deterring employers from making pension contributions. We urge the Government to use the Budget as an opportunity to stop these mixed messages and announce revised guidance.”

PKF (UK) LLP is one of the UK’s leading firms of accountants and business advisers and specialises in advising the management of developing private and public businesses. The firm has more than 1,500 partners and staff operating in 23 offices around the country. Principal services include assurance and advisory; consultancy; corporate finance; corporate recovery and insolvency; forensic; and taxation. The firm has particular expertise in advising sectors such as small and medium-sized companies; charities; hotels and leisure; medical; professional partnerships; public sector; property and construction; and technology.

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