On 26th March 2015 HMRC issued a further Revenue & Customs Brief (RCB) relating to VAT on pension fund costs.
This Brief explains that employers may recover the VAT paid on pension fund management services provided to DB pension funds in certain circumstances, where the employer, pension scheme trustees and service provider enter into a tripartite arrangement. HMRC has issued this, its fourth RCB, relating to VAT on pension fund costs in the light of the decision of the Court of Justice of the European Union (CJEU) in PPG (click here to view the RCB).
Below we have set out the background, the key points from the RCB and a suggested way forward.
The CJEU decided the Dutch case of PPG on 18 July 2013. The CJEU held that an employer can recover the VAT on the costs of both administration and investment management services which are incurred for the purposes of running a legally and fiscally independent pension fund set up by the employer for the benefit of employees and former employees.
In the past HMRC had allowed the employer to recover the VAT on administration costs whether those services are contractually supplied to the pension fund trustees (which is usually the case) or to the employer. In cases where the service provider supplied both administration and investment management services recorded on a single VAT invoice, HMRC allowed the employer to recover 30% of that VAT as a proxy for the element relating to administration. The remaining element for investment management was regarded as purely pension scheme related and therefore not recoverable by the employer, but in certain cases some of this VAT can be recovered by the pension fund if it is separately VAT registered.
The decision in PPG has caused HMRC to rethink completely how and to what extent employers can recover VAT on pension fund services. HMRC issued 3 RCBs last year (on 3 February, 27 May 2014 and on 25 November 2014) and a fourth (also on 25 November 2014) on the impact of another CJEU case ATP, which addressed the scope of the VAT exemption for the management of defined contribution pension schemes.
Key points from the RCB
HMRC has effectively acknowledged that pension law requires the pension scheme trustees to appoint certain service providers including fund managers. This RCB focuses only on pension fund management services provided to DB schemes and not on other services that the pension scheme trustees or the employer may receive relating to the pension scheme. It is anticipated these other services will be the subject of separate guidance.
In order for the employer to recover any of the VAT on the cost of investment management and administration services, it needs to (a) receive a supply of services which it uses for the purposes of its business as an overhead cost; and (b) pay for these services.
However, in the light of the requirements of both VAT and pensions law, HMRC has now acknowledged that employers who enter into tripartite arrangements with the fund manager and the pension scheme trustees will, in principle, be able to recover the VAT on fund management services so long as the terms of the tripartite agreement meet certain minimum criteria, the details of which are set out in the RCB.
The criteria set out in the RCB include the requirement that service provider makes its supplies to the employer and that the employer makes a direct payment for the services and that certain benefits of the services are provided (subject to potential conflicts of interest) to the employer.
The RCB also states that further guidance will be issued in relation to the possibility of VAT grouping the pension scheme with that of the employer and the provision of services to pension schemes by other service providers and supplies by trustees to their employers to run the pension scheme.
Suggested way forward
Employers and pension schemes will need to consider how best to mitigate the VAT costs of running schemes.
The requirements of pension law and VAT are not straightforward to reconcile if the employer is to recover any VAT. However, if tripartite arrangements are entered into it may give employers far greater VAT recovery than was previously permitted under the guidance set out in Notice 700/17.
If employers and pensions schemes choose to adopt the proposals set out in this RCB, it will require careful consideration as to its impact. Equally fund managers and administrators will need to consider the impact of this RCB if they are asked to enter into a tripartite arrangement.
Although the transitional period to 31 December 2015 seems a long way off, it can take time to arrange matters with trustees, employers and service providers. It is therefore very much worth considering the options at an early stage and not delaying.