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Claiming tax relief on expenses during a company closure

My clients have inquired about the possibility of claiming relief for expenses incurred in connection with closing down their company.  In particular, they would like to know whether they could get tax relief for professional advice that they have taken and whether they can arrange for the company to make pension contributions on behalf of employees.

As ever, we must first consider whether the expense meets the wholly and exclusively (‘W&E’) test for the purposes of trade (s54 CTA 2009). We also consider whether the expenses are capital in nature. If the W&E test is not met or the expense is considered to be capital then the expense will be disallowed in computing profits.

Here, it is not yet clear what the professional fees relate to.  In order to be allowable, we must be able to identify whether they are incurred in the normal course of business. In contrast, where they relate to the closing down of the company then they are likely to be capital in nature.

It may be helpful to review HMRC’s guidance at BIM46435, which sets out examples of capital expenditure.

Turning now to pension contributions, these would be allowable if it can be demonstrated that they are part of a remuneration package paid W&E for the trade.

However, in the case of CIR v Anglo Brewing Co Ltd [1925] 12 TC 803 the High Court was of the view that pension contributions made after it was decided that the business would cease would not be allowable.

This would suggest that pension contributions might be disallowed but we would need further information in order to be conclusive. For example, if your clients have a contractual obligation to make contributions, or a pension fund is underfunded or there was a long-standing practice to make such payments then it is still possible to successfully demonstrate that these contributions should be allowable because they meet the trade purpose test. See HMRC’s guidance at BIM46040 for further details.

In this case, if the advice relates to personal tax matters of the directors then this may result in a benefit in kind and the need for a P11d form. Having stated this, there may be an exemption where the professional advice relates to pensions (capped at £500/tax year).

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