Employer Asset-Backed Contributions: The final piece of the ABC jigsaw?

Introduction

The Finance Act 2012, which received Royal Assent this week1, brings into force legislation on employer-asset backed contributions (ABCs) to occupational pension schemes, aimed at clamping down on arrangements that deliver excessive tax relief. ABCs have been on the Government’s radar since the 2011 Budget, with several changes to the legislation since it was first published in draft.

In this Alert:

Key points
ABCs: A potted history
Applying the rules for Structured Finance Arrangements
Finance Act 2012
The end of the story?

Key points

FA12 includes provisions that are designed to align the tax treatment of ABCs with the accounting rules for Structured Finance Arrangements (SFAs), limiting tax relief to reflect the value of the assets received by the scheme.
As the new legislation was announced in stages, different provisions will apply depending on when an ABC was set up and when payments are made to the arrangement. Draft HMRC Guidance 2 explains the availability of upfront tax relief.
Straightforward cash contributions or the outright transfer of ownership of an asset from an employer to a pension scheme will continue to be eligible for tax relief.

ABCs: A potted history

Under FA04, tax relief on employer contributions to a registered pension scheme is provided by allowing contributions to be deducted as an expense of the business, so reducing the taxable profit.

ABCs may be structured in such a way that, although the employer receives upfront tax relief for a contribution paid to the pension scheme, the scheme itself only receives cash payments over the term of the arrangement. In addition, where the arrangement involves an asset which generates an income stream to the pension scheme, it is possible for the employer to obtain both upfront tax relief on the pension contribution, as well as in respect of the income payments.

Following its announcement at the 2011 Budget, the Government consulted 3on changing the tax rules around ABCs made by employers to registered pension schemes, seeking views on proposals to ensure that excess tax relief could not arise in respect of such contributions. It confirmed in its consultation responsethat it would introduce provisions in the FA12 to align the tax treatment of ABCs with the accounting rules for SFAs.

New provisions announced on 29 November 2011 aim to ensure that an employer receives appropriate tax relief in respect of the actual payments made to a pension scheme under an ABC arrangement. Further refinements followed, with announcements on 22 February 2012 and in the Budget on 21 March 2012.

Applying the rules for Structured Finance Arrangements

Whether or not an ABC arrangement is within the SFA rules will determine the extent to which tax relief is available. The SFA rules are quite complex but, broadly speaking, they apply if a person enters into a scheme which in economic terms is the same as a secured loan under which the borrower would be entitled to relief on payments of principal (as well as interest).

Under the SFA rules, upfront tax relief will be available where an ABC arrangement is accounted for as a financial liability (or debt) of the employer or of any special purpose vehicle set up for the purposes of the ABC. Relief will not, however, be available on instalments of income paid into the pension scheme, except for interest.

Where an ABC arrangement is not within the SFA rules, no upfront tax relief will apply but relief may be available on subsequent income payments to the scheme.

A balancing tax charge intended to recover excess relief from an employer may arise in certain circumstances (for example, where an ABC initially accounted for as a financial liability is subsequently reduced by an event other than payments made by the employer). Under anti-avoidance measures, relief may also be clawed back if an employer sets up an arrangement with the aim of receiving excessive tax relief.

Finance Act 2012

The various provisions generally take effect from the dates on which they were announced, so the impact for an ABC arrangement will depend on when it was set up and when contributions are paid under it.

Pre-November 2011 ABC arrangements

Where the SFA rules apply to an ABC set up before 29 November 2011, assuming that upfront tax relief has already been granted, only relief on the interest element of subsequent payments will be available. However, a balancing tax charge (as described above) may bite if the ABC arrangement subsequently changes.
If the ABC would not have qualified for upfront tax relief under the new legislation, transitional provisions will apply so that:

tax relief is unlikely to be available on income payments made on or after 29 November 2011;
where an ABC comes to an end, payments to the pension scheme made under the arrangement will be compared to the employer’s tax relief. If excessive upfront relief has been given, the employer will need to account for this as taxable profit. In contrast, if too little relief has been provided, then the employer will be regarded as having made an additional contribution to the scheme.

Arrangements with the contribution paid between 29 November 2011 and 22 February 2012

Where the SFA rules apply to arrangements set up with the employer contribution paid on or after 29 November 2011 but before 22 February 2012, the “November legislation” applies to determine whether upfront relief is available. However, certain transitional provisions in the “February legislation” will apply for any payments made, or where the arrangement comes to an end, on or after 22 February 2012.

For arrangements to which the SFA rules do not apply, relief will not generally be available in respect of contributions paid to the scheme but will be available on the ongoing income stream payments into the ABC arrangements.

February 2012 announcement

In line with the Government’s original policy aim, the February legislation is designed to limit the circumstances in which upfront relief is given. For new ABC arrangements where the contribution is paid on or after 22 February 2012, an upfront deduction will only be given where both the SFA rules and new qualifying conditions are met. Otherwise tax relief will only be available for the subsequent income payments made to the pension scheme under the arrangement.

The qualifying conditions include:

the pension contribution promised upfront under the arrangement must be due to be paid to the pension scheme and is not intended to be held in a subsidiary structure;
from the outset, regular payments due to the pension scheme under the arrangement must reduce the financial liability to nil by the earlier of the completion day or 25 years; and
the payments must be of equal amounts due at intervals of no more than one year and must be received by the pension scheme to form part of the sums held for the purposes of the pension scheme.

Budget 2012

As well as some “relieving or clarifying changes” to the February legislation, from 21 March 2012 a number of revenue protection provisions and related amendments to the SFA legislation were also introduced. These include recovery of relief when an employer ceases to be chargeable to tax4 and anti-abuse provisions to ensure that no person gains a tax advantage from the February legislation.

For ABCs in each of the three windows, the Budget 2012 measures will only have effect if the employer ceases to be chargeable to tax on or after 21 March 2012.

The end of the story?

With so many sets of changes, we can but hope that with FA12 the ABC jigsaw is now complete.

The Government has been at pains to stress that it remains keen to preserve as much flexibility as possible for employers to continue using ABCs to manage pension deficits. However, in the light of these measures, schemes which currently use ABCs (and those on the cusp of doing so) should review their arrangements with their advisers to ensure compliance with the new measures.

118 July 2012
2 Published on 13 June 2012
3 Please see our Alert: ” Consultation On Employer Asset-Backed Contributions” (dated 1 June 2011)
4 For example, when the employer winds up or migrates to another country