In our December 2011 Stop Press, we reported that the Chancellor’s Autumn Statement on 29 November 2011 had included an announcement that legislation, effective from the date of the announcement, would be introduced in the Finance Bill 2012 to deny unintended and excessive tax relief for employers in relation to asset-backed contributions (ABCs) to pension arrangements.
Since November 2011, the Government has found that there are ways in which these arrangements could be structured to gain upfront relief even though the payments will vary. So further legislation for the Finance Bill was announced on 22 February 2012 and this is intended to deny upfront relief unless the structure is an “acceptable structured finance arrangement” and all asset-backed payments to the pension scheme are to be of fixed, regular amounts.
The legislation published on 29 November 2011 will have effect on contributions paid on or after 29 November 2011. The legislation published on 22 February 2012 will have effect on contributions paid on or after 22 February 2012. For arrangements where the contribution was paid before 29 November 2011, the November transitional provisions apply where that arrangement continued at 29 November 2011.
Where those provisions do not apply, the transitional provisions in the February legislation apply to payments that arise on or after 22 February 2012. For arrangements with the contribution paid between 29 November 2011 and 21 February 2012, the November legislation will apply to determine if any upfront relief should be given.
The main difference between the two sets of provisions is that the February legislation introduces new qualifying conditions that must be met in respect of arrangements in order to qualify for upfront relief. If the contribution under an ABC arrangement is paid on or after 22 February 2012, tax relief in the form of an upfront deduction will be given for the contribution under the ABC arrangement only where both the tax rules for structured finance arrangements and the following new qualifying conditions are met:
- 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.
- The pension scheme must be the direct lender giving an ‘advance’ (the pension scheme investment) to the employer directly or indirectly through a special purpose vehicle.
- The advance must be wholly paid out of the promised contribution.
- The contribution must equal both the advance and the financial liability recorded in respect of the advance.
- 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.
- 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.
- The total amount of the payments due to the pension scheme must not be less than the contribution.
If the arrangement does not meet these qualifying conditions, upfront tax relief will not be available. Relief will only be available for the subsequent income payments made to the pension scheme under the arrangement. Schemes which have put an ABC structure in place will need to check to confirm which tax regime applies. This will depend not only on when the structure was put in place, but whether it is ongoing and payments continue to be made.
The tax information and impact note available on HMRC’s website, linked below, replaces the version published on 29 November 2011.
View the tax information and impact note.
To view stop press as a pdf.