This post was written by Leonardo Robinson and Charles Gray
A recent First-Tier Tax Tribunal case, decided on 26 November 2021, serves as a reminder to employers that any pensions-related tax deductions will only be able to attract tax relief if they were made wholly and exclusively for the purposes of the employer's trade in accordance with section 54 of the Corporation Tax Act 2009.
In this case, the claimants implemented Unfunded Unapproved Retirement Benefit Schemes (UURBS) promising pensions for certain employees at 80% or 100% of gross profits, and claimed tax deductions to reflect their liability to pay these pensions. HMRC considered that these provisions were implemented to avoid tax and consequently disallowed the deductions.
The Tribunal found that, in determining whether this liability was incurred wholly and exclusively for the purposes of a trade, it had to be considered whether reducing profits by 80% or 100% was the object, or merely the incidental effect, of entering into the pension agreements. It held that the latter was the case. It decided that, if the employers were genuinely concerned about the level of pensions provisions, they would have sought advice from a pensions adviser, not an accountancy firm, and that the fact that the size of the pensions provisions was determined as a percentage of profits before tax, regardless of the levels of those profits, illustrated that the primary purpose in entering into the UURBS by the employers had been as a tax-planning scheme to reduce their liability to pay tax without incurring any actual expenditure.
Ultimately, this decision should remind employers that any remuneration strategies implemented to maximise their tax position have to be credible, and that HMRC will be able to successfully object if contributions do not look, and feel, like regular bona fide payments to finance pensions promises.