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Finance Act 2012

Part 4 - Transitional rules (paragraphs 18 to 31)

130.Part 4 contains transitional provisions which apply the “relevant effect” of the SFA rules to those ABC arrangements where the contribution was paid before 22 February 2012, they are not an acceptable SFA, and Part 2 does not apply. These rules apply to income amounts that arise on or after 22 February 2012. There are also rules to introduce a mechanism to make a tax adjustment at the end of any of these arrangements which ensures the employer receives tax relief in respect of the total amount of payments made to the pension scheme under the ABC arrangement.

131.The transitional provision that will apply to ABC arrangements which are an acceptable SFA, and the contribution is paid on or after 22 February 2012 is new section 196I of Part 3. This section recovers any excess relief given where the relevant change or event occurs on or after either 22 February or 21 March 2012 as set out in the preceding section concerning Part 3 of the Schedule. Further detail can be found in that section and is not repeated in this part of the note.

Detail of transitional rules
Paragraphs 18 to 22 – application and interpretation

132.Paragraphs 18-22 provide for application and interpretation of the terms used in Part 4.

133.Paragraph 18 provides that these transitional provisions will apply where Part 2 does not apply and an ABC arrangement with the contribution paid at any time would not have received relief under new sections 196B, 196D or 196F of Part 3 had the contributions been paid on or after 22 February 2012, and the arrangement is not ‘completed’ as determined under paragraph 20 before that date. However, the reference to one year in new sections 196C(5), 196E(5) and 196G(5) should be read as a reference to 18 months for this provision.

134.Paragraph 19 provides that for the purposes of Part 4, the terms used in new sections 196B, 196D or 196F have the same meaning as in those new sections and where necessary it is assumed that those new sections have effect in relation to the employer’s contribution.

135.Paragraph 20 provides that an ABC arrangement that would be denied upfront relief under new section 196B, 196D or 196F had the contribution been paid on or after 22 February 2012 is completed if :

  • where the arrangement is a simple case, the lender etc is no longer entitled to payments in respect of the security; or

  • where the arrangement is a complex case, the share in the partnership’s profits of the person involved in the relevant change is no longer to be determined by reference to payments in respect of the security.

136.Paragraph 21 provides that “the completion day” is the earliest of the day on which the ABC arrangement is to be completed as determined at the beginning of 22 February 2012, the day on which the arrangement is actually completed, the day which is the last day of the period of 25 years from the day on which the employer’s contribution is paid, or the day on which either a completion event occurs, or, after 21 March 2012, the day on which an event as set out in paragraph 22 of this Schedule occurs. Only changes to payments made to the pension scheme in connection with an ABC arrangement will be taken into account in a completion event. Payments include drawings or distributions from a partnership, payments in respect of security and other payments in respect of an asset as read in accordance with section 776(4)(b) of CTA 2010.

137.A completion event occurs where there is a change in the number of either payments or drawings/other payments, a significant change in the amount of either a payment or a drawing/other payment is to be made, or a significant change in the time at which either a payment or a drawing/other payment is to be made.

138.A “paragraph 22” event occurs when the employer who has an ABC arrangement ceases to be chargeable to tax. Paragraph 22 sets out the circumstances, similar to those set out in new sections 196H(4) and (5) in Part 1, surrounding such cessation (see paragraphs 48 to 50 in the section covering Part 1 of the Schedule).

139.These two paragraphs (21 and 22) prevent the employer seeking to extend the duration of the arrangement or make a material change to the original position as at 22 February or 21 March 2012 (depending on the type of events) to avoid the transitional provisions set out in paragraphs 29 to 31.

Paragraphs 23 to 28 – certain tax consequences not to have effect

140.Paragraphs 23-28 deem the relevant ABC arrangements not to have “the relevant effect” as set out in paragraphs 23(3), 24(3) and 25(2). This means that on or after 22 February 2012, no deduction will be given to any income payments that the borrower (the employer or a connected party or other relevant person) makes to the lender etc under the ABC arrangement and any income amounts that have been transferred to the lender etc will be bought back into charge on the employer etc or other relevant person.

141.Paragraph 23(1) provides that paragraph 23 applies to an ABC arrangement where, had the employer’s contribution been paid on or after 22 February 2012, new section 196B in Part 3 would have applied so that the arrangement would have the “relevant effect”. The “relevant effect” defined in paragraph 23(3) is that the borrower etc (the employer etc) would receive relief for payments to the lender etc (the pension scheme) made under the arrangement either by way of an income deduction or by an income amount which would otherwise have been charged to tax not being so charged.

142.Paragraph 23(2) deems the arrangement not to have the “relevant effect” which is set out in paragraph 23(3). This means that either no relief will be given for any income payments the borrower etc (the employer etc) makes to the lender etc (the pension scheme) under the ABC arrangement or any income amounts that would have been charged to tax if not for the ABC arrangement will be brought back into tax as a charge on the employer etc.

143.Paragraph 23(4) defines the relevant effect if the borrower is a partnership.

144.Paragraph 23(5) provides that “amount” in sub-paragraphs 3 and 4 means an amount that arises on or after 22 February 2012 but on or before the completion day as set out in paragraph 21. This means that before the completion day, this paragraph prevents relief for income payments made on or after 22 February 2012 or brings back income amounts into charge from that date.

145.Paragraph 24(1) provides that paragraph 24 applies to an ABC arrangement where, had the employer’s contribution been paid on or after 22 February 2012, new section 196D in Part 3 would have applied so that the ABC arrangement would have the “relevant effect”. The “relevant effect”, defined in paragraph 24(3), is that the transferor etc (the employer etc) would receive relief either by way of an income deduction or by an amount which would otherwise have been charged to tax not being so charged.

146.Paragraph 24(2) deems the arrangement not to have the “relevant effect”. This means that either no relief will be given for any income payment made by the partnership to the lender etc (the pension scheme) under the arrangement or any amount that would have been charged to tax if not for the ABC arrangement will be brought back into tax as a charge on the transferor etc (the employer etc).

147.Paragraph 24(4) provides that for the purposes of sub-paragraph 3, “amount” means an amount that arises on or after 22 February 2012 but on or before the completion day as set out in paragraph 21. This means that before the completion day, this paragraph prevents relief for income payments made on or after 22 February 2012 or brings back income amounts into charge from that date.

148.Paragraph 24(5) provides that in determining whether the ABC arrangement would have the relevant effect, it is to be assumed that the amounts of income equal to the payments mentioned in new section 196D(2)(g) in Part 3 were payable to the partnership before the relevant change occurred.

149.Paragraphs 25(1) provides that paragraph 25 applies to an ABC arrangement where had the employer’s contribution been paid on or after 22 February 2012, new section 196F in Part 3 would have applied so that the ABC arrangement would have the “relevant effect”. The “relevant effect”, defined in paragraph 25(2), is that the “relevant member” would receive relief by way of an income deduction or by an income amount which would otherwise have been charged to tax not being so charged.

150.Paragraph 25(3) provides that a “relevant member” is a person who was a member of the partnership immediately before the relevant change in the partnership occurred and the person is not the lender.

151.Paragraph 25(4) provides that for the purposes of sub-paragraph 2, “amount” means an amount that arises on or after 22 February 2012 but on or before the completion day as set out in paragraph 21. This means that before the completion day, this paragraph prevents relief for income payments made on or after 22 February 2012 or brings back income amounts into charge from that date.

152.Paragraph 25(5) deems the arrangement not to have the “relevant effect” as set out in paragraph 25(2). This means no relief will be given for any income payments made from the partnership to the lender (the pension scheme) or any income amounts that would have been charged to tax if not for the ABC arrangement will be brought back into tax as a charge on the relevant member (the employer etc or other relevant person).

153.Paragraph 25(6) provides that in determining whether the ABC arrangement would have the relevant effect, it is to be assumed that the amounts of income equal to the payments mentioned in new section 196F(2)(e) in Part 3 were payable to the partnership before the relevant change occurred.

154.Paragraph 26 applies instead of paragraph 23, 24 or 25 if a relevant charging provision under the SFA rules applies to the ABC arrangement.

155.Paragraph 27 applies not to treat the amount of the relevant interest provision as interest if the amount arises on or after 22 February 2012 but on or before the completion day.

156.Paragraph 28 stipulates that new section 196G in Part 1 does not apply in relation to the employer’s contribution if the relevant event occurs on or after 22 February 2012. It also states that new section 196H in Part 1 does not apply to the contribution.

Paragraphs 29 to 31 adjustments

157.Paragraphs 29-31 provide 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.

158.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 22 February 2012. Any deductions and payments given before 22 February 2012 will be cancelled out in the overall adjustment so the amounts set out in paragraphs 29 to 31 do not include these sums. The adjustment can result in either a charge on the employer or further tax relief.

159.The following example illustrates how the adjustment mechanism as set out in paragraphs 29-31 works in relation to an unacceptable SFA.

  • Example B

    The ABC arrangement is a SFA with contribution paid before 22 February 2012 but it is not an acceptable SFA because of its contingent features.

    Pension scheme deficit = £400m

    Contribution paid under the ABC arrangement = £400m

    Yearly payment = £22.5m (of which £22m is the finance charge as the arrangement is a SFA) payable for 20 years.

    Two yearly payments were made before 29 November 2011.

    The last payment will vary between £0.5m and £440m depending on the pension deficit level at year 20, i.e. it is a contingent payment.

    Assume that the ABC arrangement will be completed on the day on which it is to be completed at the beginning of 22 February 2012.

  • Using Amounts A, B and C as defined in paragraph 29(1)

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

    Amount B (total amount of denied deductions on yearly payments under paragraphs 26 and 27) = £22.5m x 18 years = £405m

    Amount C = £0.5m (assuming the pension scheme does not have a deficit at year 20 and the employer agrees with the pension scheme to pay the minimum amount for the last payment)

    Pre-February deductions on yearly payments = Pre-February yearly payments (which we call Amount D which is not included in the Schedule) = £22.5m x 2 years = £45m.

    As Amount B + Amount C exceeds Amount A by £5.5m, additional relief arises under paragraph 31 of the Schedule.

    So the total relief given to the employer is the sum of Amount A (£400m) + Amount D (£45m) plus the adjustment relief of £5.5m (see the item above).  This is equal to £450.5m.

    Total payments received by the pension scheme = Amount D + Amount B + Amount C = £45m + £405m + £0.5m = £450.5m which equals the total amount of relief given.

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

160.Paragraph 29(1) defines Amount A, Amount B and Amount C for the purposes of making tax adjustments as set out in paragraphs 30 and 31:

  • 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 a relevant provision which is, as defined in paragraphs 29(2) and (3), paragraphs 23, 24 or 25, or the relevant charging provision as set out in paragraph 26, or the provision not to treat interest payment as interest as stipulated in paragraph 27, provided that there is no overlap of those payments which are denied relief under the separate provisions; 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.

161.Paragraph 29(4) defines “income deduction” for the purposes of sub-paragraph 1.

162.Paragraphs 29(5) and (6) provide that where, had the employer’s contribution been paid on or after 22 February 2012, new section 196B in Part 3 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.

163.Paragraphs 29(7) and (8) provide that where, had the employer’s contribution been paid before 22 February 2012, new sections 196D or 196F in Part 3 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.

164.Paragraphs 29(9) 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.

165.Paragraph 29(10) defines the 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 29(11), 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.

166.Paragraph 30 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.

167.Paragraphs 30(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 in which the completion day falls.

168.Paragraph 31 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 to which the employer is to be given to relief in accordance with section 196 FA 2004.

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