CFM92492 - Debt Cap: the available amount: employer asset-backed pension contribution mismatches

This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

Employer asset-backed pension contributions {#}

As a straightforward example of an employer asset-backed pension contribution, a corporate employer commits to contribute, say £85m to a registered pension scheme. However instead of contributing cash it transfers an asset generating an income stream of £10m per annum for 10 years to the scheme. The consideration of £85m (the present value of the income) is offset against the contribution payable. In the absence of specific legislation, the employer effectively gets a double deduction, first the deduction for a contribution of £85m and is also, relief from tax on income of £10m per annum which now becomes tax-exempt income of the scheme.

Legislation enacted in FA12 counters these arrangements (see PTM43310 et seq.) This legislation may simply deny a deduction for the contribution. But if stringent conditions are met, the deduction is allowed. In this case, the company continues to be treated as if it owned the asset and is therefore taxed on the income stream of £10m a year. To qualify for this treatment, the arrangement must be a ‘structured finance arrangement’ under CTA10/PT16/CH2 (see CFM73040 et seq.), but must also satisfy a number of other detailed conditions. The company is then given relief for funding costs as if it had received an amortising loan of £85m from the pension scheme, on which interest is paid and principal repaid as the pension scheme receives the income stream. Over the life of the arrangement its financing deductions will total £15m.

In a straightforward case this does not cause a problem under the debt cap. The consolidated accounts may also disclose the transaction as giving rise to a financial liability on which interest is accrued. This in-substance interest will be included as part of the available amount, by virtue of regulation 3(e) of SI 2010/2929, see CFM92470.

Not all arrangements under which relief is allowed for the asset-backed contribution are so simple; they may involve one, or more often two, partnerships. In this case it is conceivable that a financing expense equal to the funding cost under the structured finance arrangement is not disclosed in the group’s consolidated accounts. Should this scenario arise, regulations 16A and 16B of the Mismatch Regulations (S.I. 2010/3025) increase the available amount by the excess of the expense deducted under the structure finance provisions over the amount already included in the available amount. The conditions to be satisfied are complex, but these largely reflect the terms of the employer asset-backed contribution legislation, at FA04/S196B to 196L.