HMRC has issued further guidance on VAT recovery for fund management services for defined benefit pension schemes following the judgment in PPG Holdings. In the guidance, HMRC has extended for a further 12 months, until 31 December 2016, the transitional period during which a pension fund and employer may continue to apply a 70/30 asset management/administration costs split. This Brief sets out HMRC’s latest view that direct payment by the employer under a tripartite contract will not give rise to a corporation tax deduction. This brief also sets out HMRC’s views on VAT recovery where pension trustees supply scheme administration services to an employer, and where the trustee and employer are in a VAT group. HMRC will issue further guidance later this year, which may set out a possible solution to related corporation tax issues.
On 26 October 2015, HMRC
published its fifth Revenue and Customs Brief on the thorny topic of VAT on pension scheme costs (see: Brief 17/2015: deduction of VAT on pension fund management costs). In this brief, we are told that still more guidance is promised, but we are given an update as to what has been going on behind the scenes with various advisers and industry bodies, as well as where HMRC’s thinking has got to.
Readers will recall that the decision of the CJEU in Fiscale Eenheid PPG Holdings BV cs te Hoogezand (C-26/12) (PPG), given on 18 July 2013, caused HMRC to rethink its policy on VAT and pension funds set out in Notice 700/17. More than two years after this judgment, the position for pension funds and employers is still not clear. As a result, HMRC has announced that it will extend the transitional period, allowing employers and pension schemes to rely on the guidance set out in Notice 700/17 until 31 December 2016.
HMRC has made it clear that, in order for an employer to recover any VAT payable on the cost of running an occupational pension scheme, the employer must both contract for and pay for the services. However, pension law requires that certain services are procured by the trustees of the pension scheme, rather than by the sponsoring employer. Accordingly, it is not straightforward for the employer to recover the VAT payable on pension scheme costs. HMRC has been considering various possible solutions to mitigate the VAT costs of running a pension scheme and, in this latest RCB, it has set out its view on how the three options it has considered would operate.
In Brief 8/2015, HMRC set out that it would allow an employer to recover VAT paid by it as part of a tripartite contract between it, the pension scheme trustees of a defined benefits pension scheme and a pension fund manager. That brief set out detailed guidance as to the form of such a tripartite contract.
In this latest brief, HMRC has announced that although an employer can recover the VAT payable under such a tripartite contract, in its view direct payment by an employer of asset management costs does not clearly fall within the sponsoring employer’s profit and loss account or contributions to a pension scheme; and, therefore, will not attract a deduction for corporation tax purposes.
As an alternative, scheme administration services may be provided by the pension scheme trustees to the employers. This does not require the use of tripartite contracts, as a VAT registered pension scheme itself provides scheme administration services to the sponsoring employer. This service is subject to VAT, and the VAT thereon is recoverable by the employer, subject to the usual rules on input tax deduction. The VAT registered pension scheme is entitled to recover, in full, the VAT which it pays on administration and general scheme related expenses (including legal, audit or actuarial services), which are used by the trustees to make the onward VATable supply to the employer.
However, HMRC has pointed out that VAT payable on asset management services will not be recoverable in full. This is because the input tax thereon will relate to both taxable supplies to the employer and to any VAT exempt supplies made by the pension scheme trustees as part of its investment activities.
This option may be suitable if there is a corporate trustee of a pension scheme that is eligible to be VAT grouped with the sponsoring employer. In this instance, any supplies made by the corporate trustee, including dealing in the assets of the fund, are deemed to be made by the VAT group representative member.
HMRC has said in this latest brief that the cost of administration and other general scheme related services that do not have a direct and immediate link to the management of a pension scheme’s assets, and therefore the scheme’s investment activity, will be overhead costs of the VAT group. They will be deductible in accordance with the usual VAT deduction rules. Again, any VAT payable on asset management services which has a direct and immediate link to the trustee’s VAT exempt investment activity and potentially to the VAT group’s overhead costs will only be partly recoverable according to partial exemption rules.
HMRC has confirmed that its position remains that it is unable to recover VAT from scheme assets under the statutory provisions concerning joint and several liability of VAT group members, except to the extent that the relevant VAT debt is attributable to the administration and operations of the pension scheme.
Pension schemes and sponsoring employers will welcome the extended transitional period, but careful thought will now have to be given as to how best to mitigate the VAT costs of running a pension scheme, whether that is a defined benefit scheme, defined contribution scheme or some other variation.
It is clear that there is not one easy solution to the VAT and corporation tax issues that have arisen. HMRC has said that it will issue further guidance later this year, which may set out a possible solution to the corporation tax issues.
Both the employers and pensions scheme trustees need to be actively thinking about the VAT which is payable on all costs of running the pension scheme and how best to mitigate that VAT. It may be that the options set out above will suffice for some pension schemes; others may need to explore hybrids or indeed other potential solutions. HMRC has worked hard to try and mitigate the VAT costs of running a pension scheme, but each pension scheme and employer will have to think carefully about how it should proceed to ensure that it does not fall into any tax or pensions law traps. In many cases, it may indeed be beneficial to make the changes sooner, rather than to wait until the end of next year when the transitional period ends.
