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Finance Act 2012

Paragraphs 12 to 14 adjustments

86.Paragraphs 12-14 provides for a tax adjustment on the employer when the ABC arrangement ends to ensure that the total amount on which relief is given to the employer will accurately reflect, but will not exceed, the total amount of payments actually given to the pension scheme under the arrangement.

87.This adjustment mechanism will take into account not just all the payments actually made to the pension scheme but also all the relief in the form of deductions against taxable profits or income given to the employer before and after 29 November 2011. Any deductions and payments given before 29 November 2011 will be cancelled out in the overall adjustment so the amounts set out in paragraphs 12-14 do not include these sums. The adjustment can result in either a charge on the employer or further tax relief.

88.The following example uses the facts as set out in Example 3 in the consultation document, Employer Asset-backed Pension Contributions (6) published on 24 May 2011 on both the HMRC and HM Treasury websites, and illustrates how the adjustment mechanism as set out in paragraphs 12-14 works.

  • Example A

    The ABC arrangement does not fall within the SFA rules.

    Pension scheme deficit = £400m

    Contribution paid under the ABC arrangement = £400m

    Yearly payment = £22.5m (of which £2.5m could be a finance charge if the arrangement were a SFA) payable for 20 years.

    Two yearly payments were made before 29 November 2011.

    Assume that the ABC arrangement will be completed on the day on which it is to be completed at the beginning of 29 November 2011.

  • Using Amounts A, B and C as defined in paragraph 12(1)

    Amount A (relief for E’s contribution) = £400m

    Amount B (total amount of denied deductions on yearly payments under paragraph 9, 10 or 11) = £405m (including the last payment at year 20)

    Amount C = 0 (as the last payment falls within the meaning of “income deduction” as set out in paragraph 12(2) and so paragraph 12(1)(c)(iii) is not met)

    Pre-November deductions on yearly payments = pre-November yearly payments = Amount D (which is not included in this Schedule) = £22.5m x 2 years = £45m.

    As Amount B + Amount C exceeds Amount A by £5m, additional relief arises under paragraph 14 of the Schedule.

    So the total relief given to the employer is the sum of Amount A (£400m) and Amount D (£45m), plus the adjustment relief of £5m (see the item above).  This is equal to £450m.

    Total payments received by the pension scheme = Amount D + Amount B + Amount C = £45m + £405m + 0 = £450m which equals the total amount of relief given.

    This means that the employer relief accurately reflects the payments actually received by the pension scheme.

89.Paragraph 12(1) defines Amount A, Amount B and Amount C for the purposes of making tax adjustment as set out in paragraphs 13 and 14:

  • Amount A is the total amount of relief given in respect of the employer’s contribution paid under the ABC arrangement;

  • Amount B is the total of any amounts in respect of which the employer has been denied relief under paragraphs 9, 10 or 11. These are the payments for which a deduction has been denied or the amounts brought back to charge on the employer etc or other relevant person; and

  • Amount C is the amount of the payment made under the ABC arrangement before the completion day which is not reflected in Amount B, is not the subject of an income deduction and is not a contribution paid by the employer to the pension scheme, but it nevertheless becomes part of the sums held by the pension scheme.

90.Paragraph 12(2) defines “income deduction” for the purposes of sub-paragraph 1.

91.Paragraphs 12(3) and (4) provide that where, had the employer’s contribution been paid on or after 29 November 2011, new section 196B in Part 1 would have applied, Amount C is the payment (if any) which the borrower etc makes to the lender etc in order to acquire the security or an asset in place of the security under the ABC arrangement.

92.Paragraphs 12(5) and (6) provide that where, had the employer’s contribution been paid before 29 November 2011, new sections 196C or 196D in Part 1 would have applied, Amount C is the payment (if any) which the employer etc makes to the lender etc in order to reverse the relevant change in relation to the partnership or any payment made by the employer etc to the responsible authority to buy back its interest in any partnership involved in an arrangement.

93.Paragraphs 12(7) provides that Amount C is to be taken to be nil where, between 22 February 2012 and the day before the completion day, a commitment is given to a “relevant person” directly or indirectly and the commitment is to secure that a person receives money or another asset that is linked to the making of the payment covered by Amount C.

94.Paragraph 12(8) defines “relevant person” as the employer, a person connected with the employer, a person acting at the direction or request, or with the agreement of the employer or the connected person, a person chosen by the employer or the connected person or a class of person so chosen, or a partnership. However, as set out in paragraph 12(9), the relevant person does not include the persons who from time to time are the trustees of the pension scheme or the persons controlling the management of the scheme.

95.Paragraph 13 provides that at the end of the completion day, if the amount of tax relief that has been given to the employer in respect of the contribution paid under an ABC arrangement is greater than the total amount of payments made to the pension scheme, then the excess tax relief in the form of the difference between the two amounts will be recovered from the employer.

96.Paragraphs 13(1) and (2) provide that where amount A is greater than the sum of Amount B and Amount C, the excess will be either treated as a profit or income arising on the employer in the period of accounts (see footnote 4) in which the completion day falls.

97.Paragraph 14 provides that that at the end of the completion day, if the amount of tax relief that has been given to the employer in respect of the contribution paid under the ABC arrangement is less than the total amount of payments made to the scheme, then the employer will be entitled to additional relief. Where the sum of Amount B and Amount C exceeds Amount A, the excess is treated as an employer contribution paid on the completion day for which the employer is to be given relief in accordance with section 196 FA 2004.

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