Before A Day, employer contributions to occupational pension schemes were limited by the Inland Revenue's maximum funding rules. The FA 2004 removed those constraints, introducing uncertainty for employers about allowability for tax where the contribution might appear large. The HMRC officer dealing with the Income Tax/Corporation Tax return of the employer will consider questions as to whether the contribution is an allowable expense.

On 29 January 2006 we reported publication by HMRC of draft guidance on when an employer's contribution to a registered pension scheme will be allowable as a deduction in computing the employer's trading profits for tax purposes (applicable to accounting periods ending on or after 6 April 2006). Later on we noted HMRC's 'final' draft guidance, published at the end of March 2006. (Another briefer version, confusingly also still available on the web in the practitioners area, lacks some material, such as on allowability of contributions paid by third parties under guarantees.)

Silence then endured, until the promised guidance finally appeared this week in the Business Income Manual (BIM). It also covers multi-employer schemes, payments made by third parties, and the pre-A Day position too.

The guidance confirms that an employer contribution will be deductible provided it is "wholly and exclusively" for the purposes of the trade. A pension payment by an employer will normally pass this test even when the employees in respect of which the contribution is being made are retired or those of another employer. Indeed, the guidance emphasises that it will be relatively rare for HMRC even to have to consider whether there is a non-trade purpose.

Small schemes (formerly SSASs) are probably the most likely to experience difficulty with their local inspector of taxes; for example, when an employer contribution is paid in respect of a controlling director or an employee who is a close relative or friend of the director or business proprietor. This will be especially true where there is no close comparator among unconnected employees, or none receiving a comparable remuneration package. Where the contribution is part of a remuneration package which is deemed excessive (ie it cannot be justified on ordinary commercial grounds) for the value of the work undertaken by that individual for the employer, HMRC will consider whether the amount of the overall remuneration package, not simply the amount of the pension contribution, was paid wholly and exclusively for the purposes of the employer's trade. A cross-reference to further guidance on this crucial issue may be relevant, although it apparently has yet to be updated post-A Day.

Another situation concerns pension contributions paid by investment companies and others who are not carrying on a trade. Pre-A Day, in respect of controlling directors only contributions paid to a scheme set up under ICTA 1988 s.590 (mandatory approval) were allowable. FA 2004 s.196(3) allows relief in general, but whether substantial contributions would be deductible is less clear. The cross-reference supplied at BIM46001 is again to a page (this time from the Corporation Tax Manual) which pre-dates the new tax regime. It is possible that only modest contributions will be allowable, based on an assessment of the value of the work undertaken.

Uncertainty also surrounds the allowability of a contribution paid to purchase a Hancock annuity. Before A-Day, this was approvable to pension a retiring or former employee, either before or after age 75. As the term 'Hancock annuity' cannot be found in either the RPSM or the Finance Act 2004, or in any secondary legislation made under the Act, we have asked HMRC 'would the payment of a pension in these circumstances constitute an authorised payment?' It seems to us that provided it complies with the pension rules at FA 2004 s.165, it would, but uncertainty remains about allowability of the employer contribution. If it is paid to meet a contractual obligation, it might qualify (BIM 46040), but that would probably be unusual.

Providing a pension for a former employee under age 75 who is not 'connected' (ICTA 1988 s.839, as amended - basically, spouses, civil partners and relatives of either or other relatives of the employee) to the employer should not be a problem (and does not need the Hancock procedure). However, provision for someone over age 75 - as would have been allowed pre-A-Day by means of a Hancock - or provision for a connected employee are far more likely to be problematical.

On the positive side, the guidance tells the local inspector

"If, having obtained the facts and considered the guidance, you consider that a contribution was not or may not have been made wholly and exclusively for the purposes of their trade, you should first make a report to Technical Team, Charities, Assets Residence (CAR Trusts, Inheritance and Pensions), Yorke House, Castle Meadow Rd, Nottingham, NG2 1BG before challenging the deduction."