A simple change to scheme rules is sufficient to establish the employer’s entitlement to recover VAT on services to its pension scheme.

This is the new proposal the Association of Pension Lawyers (APL) has put to HMRC, which is now considering the idea.

If it agrees, employers, trustees and providers of services will be spared the time and cost of rearranging supply contracts.

In the short term, the APL’s move is likely to prolong the current uncertainty about VAT recovery.  It has asked HMRC to extend the current transitional period that allows long-standing invoicing arrangements to continue pending a final resolution.

APL approach

The APL argues that a new scheme rule is enough to establish the “direct and immediate link” between the employer’s business and the cost of servicing the scheme that is required for VAT recovery.

The rule would say the employer and the trustees acknowledge the scheme is set up and run for the benefit of the employer’s workforce.  It would be wide enough to cover all services.  See the box for the suggested wording.

APL’s proposed scheme rule

“The Principal Employer and the Trustees acknowledge that the Scheme provides pension and/ or other benefits to the beneficiaries of the Scheme which include employees and former employees of the current and former Participating Employers.

The Principal Employer acknowledges that the Trustees may procure, for the proper management and operation of the Scheme, and subject to the provisions of [this Deed/the Rules] and any statutory requirements, services relating to the management and operation of the Scheme (including the funding of the Scheme, the administration of the benefits payable under the Scheme and the management of the assets of the Scheme), for the purposes of providing those pension and/or other benefits on behalf of the current and former Participating Employers.”

Tripartite contracts

A one-off rule amendment is a lot simpler than the “tripartite contract” approach HMRC has focused on in its Briefs over the last 18 months (most recently Brief 8 /2015 in March).  Here  the “direct and immediate link” is established by the employer becoming party to the contracts for the various supplies to the scheme alongside the trustees.  One obligation it would have under the contract would be to pay for the services.

This approach faces legal difficulties and the practical drawback of the time and cost of negotiating amendments to, for all affected schemes, thousands of supply contracts.

Examples of unresolved legal issues include reconciling the approach with:

  • pensions legislation like trustees’ statutory duties to appoint certain advisers,
  • general law issues like confidentiality, legal privilege and conflict of interest and
  • constraints that some regulated professionals like actuaries and lawyers need to observe.

​There is also the possibility HMRC might say only some elements of a service were for the employer’s benefit and restrict VAT recovery accordingly.

Transitional period

As things stand, the transitional period for continuing the practice (based on VAT Notice 700/17) of invoicing the employer for services (bar investment) to the trustees is due to expire on 31 December 2015.

HMRC’s last public statement (Brief 8) about its future intentions was:

“HMRC has received enquiries in respect of the impact of the PPG decision on VAT recoverability relating to:

  • other [i.e. other than investment management] types of service (such as legal, actuarial and accounting services),
  • other [i.e. other than DB] types of pension scheme (such as defined contribution and hybrid),
  • VAT Groups that include a corporate trustee and a sponsoring employer,
  • trustees that charge employers to run their pension schemes.

HMRC has been discussing these matters with interested parties and intends to provide further guidance in the summer [2015].”

Now the deadline has passed, the APL has asked HMRC to confirm what it intends to do about providing guidance on these points.

Also the APL has challenged HMRC’s position that the tripartite approach only applies to DB schemes and not other types.

What do employers and trustees do now?

In current circumstances it is impossible to anticipate what HMRC’s next step will be or when it might come.

VAT is chiefly an issue for employers and they should normally take the lead rather than the trustees.  If an employer is minded to change the status quo, the trustees will normally have a role.

Employers should consider their options.  In the current uncertainty, they all have pros and cons.

The position was already uncertain pending the guidance HMRC promised for the summer.  Now the APL’s proposal raises the possibility that HMRC’s eventual position might be that a rule amendment will be sufficient for recovery, perhaps with tripartite contracts as an equally effective, if more complicated, alternative.  Or the new proposal might be rejected.  In any event, uncertainty will continue in the short term while HMRC considers its position.

HMRC’s Briefs so far have concentrated on recovery in  relation to investment management costs.  They give sufficient guidance to make it thinkable to draft a tripartite contract that would satisfy them.  There would be no guarantee, however, that it would be possible for an employer to agree terms with its trustees and the investment manager even if they  are willing in principle to work towards such a contract.  In a novel field, each party is likely to want legal advice, increasing the likelihood that agreement, if it is reached, might not be achieved by the end of the current transitional period (with some potential loss of recovery).

There is no HMRC guidance on tripartite contracts for advisory services like actuarial, financial and legal with their particular legal and regulatory issues.  Negotiating against that background would be more difficult.

On the general principles set out in the Briefs, a contract for day-to-day scheme administration is one where a tripartite approach looks feasible in principle.  On the whole there are fewer legal and regulatory issues here because the service naturally benefits employer and trustees, and the supplier does not generally give sensitive professional advice.

And, of course, all work on tripartite contracts could prove redundant if HMRC accepts the APL’s suggestion.

The time and cost of tripartite contracts is likely to be an important consideration too.

Meanwhile, given the missed target for more HMRC guidance in the summer, an extension to the current transitional period looks reasonably likely, whatever final position HMRC reaches and whenever that is.  Yet an extension is not certain.

Clarification from HMRC

The APL has received clarification that the current transitional period applies to “transactions with a time of supply (i.e. the earlier of payment or invoice date) falling on or before the 31 December deadline or, in the case of continuous supplies of services, services provided prior to 1 January 2016 (even if they are invoiced / paid for after 31 December)”. This means it is not necessary for invoices to be paid before the end of the period.