Clause 48 - Employer asset-backed contributions etc

Part of Finance Bill – in a Public Bill Committee at 3:00 pm on 14 June 2012.

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Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury 3:00, 14 June 2012

It is a pleasure to serve under your chairmanship, Mr Amess. Clause 48, which introduces schedule 13, makes changes to the tax rule that will apply to asset-backed pension contributions to preserve their flexibility while preventing excessive tax relief. I will give the Committee some background. Employer asset-backed pension contributions allow an employer to put in place arrangements to reduce the funding deficit of the registered pension schemes. They also provide employers with flexibility around making pension contributions against sometimes volatile deficit levels without affecting their cash flows. At the same time, the arrangements give pension schemes the security required to meet their obligations to members.

The Government recognise the commercial benefits of the arrangements and want to ensure that they can be used as a way of funding pension schemes. However, some of the arrangements can give rise to unintended excess tax relief, as a result of the ways in which they are structured.

In the Budget 2011, we announced a consultation on changing the tax rules that apply to asset-backed pension contributions. The arrangements involve an employer committing to make a series of payments to the pension scheme by transferring an income-producing asset to the scheme. The arrangement will provide security to the pension scheme, because the asset will be passed to the scheme if the employer cannot make the payments during the arrangement period. On completion of the arrangement, the asset will be returned to the employer.

Following the consultation, we announced changes on 29 November 2011, with effect from that date, to prevent forestalling risks. Further changes were announced in February of this year to preserve the original policy objective following comments received on the draft legislation. Further minor changes, effective from 23 March 2011, were announced at Budget 2012.

The changes made by the clause and schedule will ensure that up-front tax relief would be given to asset-backed pension contribution arrangements only where they meet certain conditions. The conditions will ensure that at the start of the arrangement, the pension contribution promised by the employer is guaranteed to be paid by the end of the arrangement. Where that is not the case, the provisions will ensure that up-front relief is not given. The changes will save the Exchequer nearly £2.5 billion between now and 2016-17 by preventing excessive tax relief arising to those employers who made use of particular types of asset-backed pension contributions. The majority of employers are not affected by the measure.

Schedule 13 also includes minor changes to the legislation on structured finance arrangements. This will make it easier for an asset-backed contribution arrangement to qualify for up-front relief, while reducing avoidance risks in the context of the structured finance arrangement legislation.

I will turn briefly to the amendments. It has come to HMRC’s attention that some pre-existing arrangements, where the contribution was paid before 22 February 2012, may be affected in unintended ways by the transitional provisions in parts 2 and 4 of the schedule. The relieving amendments remove the unintended consequences to ensure that the relief given to the employer under such an arrangement accurately reflects, but does not exceed, payments made to the registered pension scheme. The amendments also clarify the fact that payments or determinations made in the first working day following the end of the 12-month period will not prevent any arrangement from gaining up-front relief where contributions are paid on or after 22 February 2012, provided that the arrangement meets all the other qualifying conditions.

The reforms will help to protect the Exchequer against significant tax risks while at the same time providing employers with the flexibility to continue to use asset-backed pension contributions.