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HMRC internal manual

Pensions Tax Manual

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Contributions: tax relief for employers: asset backed contributions: asset-backed contributions paid between 29 November 2011 and 21 February 2012 inclusive

Glossary  PTM000001
   

Asset-backed contributions paid between 29 November 2011 and 21 February 2012 inclusive
Consequence of the arrangement being a structured finance arrangement
Consequence of the arrangement not being a structured finance arrangement
Asset-backed contribution that qualified for upfront relief: subsequent events
Anti-avoidance rule
Reduction of financial liability
Specified events occurring on or after 21 March 2012

Asset-backed contributions paid between 29 November 2011 and 21 February 2012 inclusive

Part 1 Schedule 13 Finance Act 2012

The guidance at PTM043320 sets out the Conditions A, B and C that, if met, would deny the employer upfront relief for a contribution paid on or after 22 February 2012 using a simple asset-backed arrangement. It also set out Conditions A and B that, if met, would deny relief for a contribution paid using a complex asset-backed arrangement, whether that arrangement used an existing partnership or involved the creation of a new partnership. Condition B in all of those cases was that the asset-backed arrangement was not an ‘acceptable structured finance arrangement’.

For contributions paid between 29 November 2011 and 21 February 2012, the conditions are the same; with the exception that Condition B states that ‘the asset-backed arrangement is not a structured finance arrangement’. The description of a structured finance arrangement still allowed asset-backed contributions arrangements to be designed in such a way that the payments to the pension scheme were loaded towards the end of the term. This led to the tightening of the legislation by the introduction of the concept of an ‘acceptable structured finance arrangement’ with effect from 22 February 2012.

The guidance at PTM043320 can be read to determine whether upfront relief is available for a contribution paid between 29 November 2011 and 21 February 2012 by considering if the arrangement falls to be treated as a structured finance arrangement (rather than an acceptable structured finance arrangement). Conditions M to Q are not relevant in this consideration. Unlike the Condition M test of an acceptable structured finance arrangement, the version of the Condition B legislation given in Part 1 Schedule 13 Finance Act 2012 does not tie the simple asset-backed arrangement to being a Type 1 structured finance arrangement, nor the complex asset-backed arrangements to being either Type 2 or Type 3 structured finance arrangements. In practice, however, it is likely that this correlation between the asset-backed arrangements and the three types of structured finance arrangements will exist.

Consequence of the arrangement being a structured finance arrangement

Condition A in each of the three types of arrangement is drawn widely to ensure that pension contributions that are structured through these arrangements fall to be considered under these rules. Whether or not the employer is able to claim relief for the contribution paid will usually be determined by whether the arrangement is considered to be a structured finance arrangement.

Condition B for each type of arrangement is written in the negative, i.e. the arrangement is not a structured finance arrangement. If an arrangement is a structured finance arrangement then Condition B will not be met. This means that Condition B will not operate to deny relief to the employer for the contribution paid to the registered pension scheme.

Where the employer receives upfront relief for the contribution paid to the scheme using an asset-backed arrangement, the arrangement will need to be kept under review over the course of its term to confirm that it continues to be an acceptable arrangement. In particular, certain events may arise which will require re-examination of the tax relief given in respect of arrangement. This is covered later in this guidance.

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Consequence of the arrangement not being a structured finance arrangement

If the arrangement is not a structured finance arrangement, then Condition B will be met. If Condition A is also met (and Condition C also met in the case of a simple arrangement), then the legislation operates to deny the employer relief in respect of the contribution paid to the pension scheme.

In these cases, relief will generally be available to the employer (or other members of the group) in relation to the ongoing income stream payments into the asset-backed arrangement. For example, if the group occupies a property that has been transferred, they will be paying rent. Alternatively, if the assets transferred relate to intellectual property, the group may be paying licence fees in respect of the assets.

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Asset-backed contribution that qualified for upfront relief: subsequent events

Part 1 Schedule 13 Finance Act 2012

Where upfront relief is available for a contribution paid using an asset-backed arrangement between 29 November 2011 and 21 February 2012, the arrangement needs to be kept under review. The legislation provides for an amount to be brought into charge to tax where:

  • certain avoidance arrangements are entered into
  • there is a reduction in the recorded financial liability other than by reason of a relevant payment
  • certain specified events occur on or after 21 March 2012.

‘Relevant payments’ are those payments made under the asset-backed arrangement that are intended to reduce the financial liability over the term of the arrangement.

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Anti-avoidance rule

Section 196F Part 1 Schedule 13 Finance Act 2012

This rule applies if the employer, or a person connected with the employer, enters into an arrangement the main purpose, or one of the main purposes, of which is to secure that the total amount of the relevant payments will be less than the amount of the employer’s contribution. An arrangement in this context is the avoidance arrangement as distinct from the asset-backed arrangement itself.

If the avoidance arrangement is entered into at the same time as, or earlier than, the advance is made then the asset-backed contribution arrangement is to be treated as if the relevant Condition B was met from the outset. In other words, upfront relief will not be available for the contribution paid by the employer.

If an avoidance arrangement is entered into after the advance is made, the amount of ‘the relevant financial liability’ is brought into charge to tax.

For corporation tax purposes, the amount is treated as if it were a profit arising from the employer’s loan relationships and is chargeable to corporation tax under Section 299 Corporation Tax Act 2009 in the accounting period in which the avoidance arrangement is entered into.

For income tax purposes, the amount is treated as an amount of income chargeable to income tax under Chapter 8 of Part 5 ITTOIA 2005 in the tax year in which the avoidance arrangement is entered into.

The relevant financial liability is the amount of the outstanding recorded financial liability (determined in accordance with generally accepted accounting practice) at the time the avoidance arrangement is entered into. The amount treated as income or profit as a result of this rule must not exceed the total amount of relief given in respect of the employer’s contribution.

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Reduction of financial liability

Section 196G Part 1 Schedule 13 Finance Act 2012

If the financial liability is reduced by any event other than the making of a relevant payment then an amount is to be brought into charge to tax. The amount to be charged is the amount of the reduction in the financial liability.

For corporation tax purposes, the amount is treated as if it were a profit arising from the employer’s loan relationships and is chargeable to corporation tax under Section 299 Corporation Tax Act 2009 in the accounting period in which the event occurs.

For income tax purposes, the amount is treated as an amount of income chargeable to income tax under Chapter 8 of Part 5 Income Tax (Trading and Other Income) Act 2005 for the tax year in which the event occurs.

The amount of any sums treated as income or profit must not exceed the total amount of relief given in respect of the employer’s contribution.

Where this section applies, the structured finance arrangement legislation should not be applied to the transaction from the date of the event onwards. The exception to this is where the event was a partial reduction to the recorded financial liability. In this circumstance, it might be possible for a person to end up in a better overall position as a result of the structured finance arrangement legislation no longer being applicable. The legislation therefore provides for ‘just and reasonable’ assessments to tax to be made to ensure that there is no such advantage is to be gained.

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Specified events occurring on or after 21 March 2012

Section 196H Part 1 Schedule 13 Finance Act 2012

The effect of the legislation dealing with a reduction in the financial liability was extended to apply when certain specified events occurred on or after 21 March 2012. These events relate to a change in the status of the employer from its position at the date the contribution was paid. This includes:

  • if the employer was within the charge to corporation tax at the time the contribution was paid, the employer ceasing to be within that charge
  • if the employer is a company, the employer entering administration or the winding up of the employer commencing
  • if the employer is a limited liability partnership to which Section 863(1) Income Tax (Trading and other Income) Act 2005 or Section 1273(1) Corporation Tax Act 2009 applies when the contribution is paid, that provision ceases to apply in relation to the employer
  • if the employer is a partnership (other than a limited liability partnership) when the contribution is paid, the partnership ceasing to carry on the trade, profession or business in question, or the partnership being dissolved
  • if the employer is an individual, the individual dying.

When such an event occurs, the financial liability outstanding immediately before the event is to be treated as reduced to nil and an amount brought into charge to tax. For the tax treatment of this amount, see the guidance above on ‘Reduction of financial liability’.