HMRC and HM Treasury have issued for consultation measures to restrict excess tax relief for employers on asset-backed funding arrangements. The proposals were first announced in the Budget earlier this year.  The key concern behind the proposals was that the tax relief available to employers putting in place asset backed funding arrangements should accurately reflect the value of contributions received by the scheme and that employers should not get tax relief by valuing the asset more generously.  Problem areas highlighted by the document include:

  • Situations where an employer might obtain tax relief twice: upfront for the discounted value of a future income stream and again for each instalment of the income stream;
  • Where the employer structures an income stream so its conditional on something happening (for instance the funding position of the scheme falling below a particular level) and that contingency does not materialise as expected; in these cases, the value put on the asset  upfront for tax purposes may exceed final value received by the scheme.

The consultation floats two measures to remove excess tax relief:

  • Providing relief only when cash is received by the scheme.  Under this proposal, the employer would get tax relief only when cash actually changes hands between the employer and the scheme, or when the scheme acquires full title to an asset that can readily be converted into cash.
  • Aligning tax rules with accounting rules. This involves amending existing tax rules to ensure that the tax treatment of the arrangements as a whole accurately reflects the economic substance of the transaction.  The consultation document states that this means that the tax treatment of the arrangements would generally follow the relevant accounting rules over the period of the arrangement.

HMRC's preference is the second of these options.  The changes to the tax rules would not apply to transactions that have already taken place and any tax relief given on the basis of the tax rules and accounting treatment used before the rules come into force will not be 'unpicked'.  Where those transactions generate income for the scheme after the new rules come into force, however, the new rules will apply to those amounts.


We do not believe that the proposals outlined in the consultation would prejudice the majority of asset backed funding arrangements that we have seen as these are designed to be tax neutral and tax is not the major driver behind these structures.  We are aware, however, of more aggressively structured arrangements and it remains to be seen if these will have to be unwound as being inefficient going forward.