This article replaces our earlier article on the same subject and reflects subsequent amendments.
The Government has introduced legislation, into the Finance Act 2012, to ensure that employers who use Asset-backed Contributions (“ABCs”) to fund deficits in their pension schemes do not benefit from excessive tax relief on those contributions. The measure that they originally proposed came into effect on 29 November 2011. However, since then the Government has decided that further clamping down is required, so the conditions that must be satisfied for up-front tax relief to be granted have been tightened in respect of contirbutions paid on or after 22 February 2012.
As a result, the heading to this article now seems singularly inappropriate!
Background
ABCs have been used by some employers recently in order to plug pension scheme deficits while restricting the amount of cash that is actually handed over by the employer. An ABC arrangement involves the offset of an employer’s legal obligation to pay a pension contribution against the pension scheme’s legal obligation to purchase an asset from the employer, directly or indirectly, using that contribution. Recent cases have included Sainsbury’s, who transferred a portfolio of its occupied properties to a special-purpose vehicle which passed the rental payments to the pension scheme, and – rather more imaginatively – Diageo, who set up a similar arrangement involving barrels of maturing whisky. In these circumstances the employer receives tax relief on the “contribution” up-front but the pension scheme receives the cash payments over the term of the arrangement. It is then possible for the employer to gain from further tax relief on the income payments derived from the asset, amounting effectively to relief being obtained twice from the same source.
Some arrangements involve also a final payment, which is paid by the employer only if the scheme still has a deficit when the ABC arrangement terminates. The employer receives tax relief on this contingent contribution when the arrangement is established but may never actually have to make the contribution!
An ABC arrangement may fall within the existing structured finance régime, the corporation tax treatment of which is governed by the Corporation Tax Act 2010. A “structured finance arrangement” (“SFA”) is an arrangement between a borrower and a lender where the borrower makes a provision in its accounts (in accordance with UK or International Generally Accepted Accounting Practice) in respect of the lump sum advance paid by the lender.
The Finance Act 2012 amends the Finance Act 2004 (which is now the main piece of legislation governing the taxation in relation to pension schemes) in respect of ABC arrangements where the employer contribution is paid on or after 29 November 2011, including more stringent requirements in relation to contributions paid on or after 22 February 2012.
The new conditions for up-front tax relief
The following conditions will have to be met for an arrangement to qualify as an “acceptable structured finance arrangement” and for the employer to be entitled to tax-relief on the contribution up-front:
- the pension contribution promised up-front under the arrangement must be due to be paid to the pension scheme and 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 paid wholly 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 within 25 years or by the completion day if earlier;
- the payments must be of equal amounts, due at intervals of no more than a 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 all these conditions, no up-front tax relief will be available.