Last week, HMRC announced that employers and trustees have until 31 December 2017 to comply with HMRC’s new requirements on the VAT treatment of pension scheme costs. Today, a further HMRC update sets out its latest position on some of the options which have been canvassed in this area.
How we got here – a reminder
Following the European Court’s decision in the PPG case, HMRC reviewed its rules on the recovery of VAT on pension scheme costs and decided that employers must receive the benefit of pension scheme services, and pay for those services, in order to recover VAT. As a result, employers face losing their existing ability to recover VAT on services to schemes unless they find a new way to structure paying for such services. A variety of alternative solutions have therefore been discussed with HMRC.
Where we are now
The new Brief summarises HMRC’s current position as follows.
Tripartite contracts: One approach is the use of tripartite contracts (between trustees, employer and each service provider) to obtain a VAT deduction. However, this approach may have corporation tax consequences for the employer. HMRC’s view is that an employer will not be entitled to a corporation tax deduction if it makes direct payment of asset management costs under a tripartite contract. This approach also raises regulatory issues for some service providers and advisers.
“On supply” agreement: Under this option, trustees contract with the employer to supply the service of running the pension scheme on the employer’s behalf. The employer can deduct the VAT it pays on the fee charged by the trustees under the contract. HMRC confirms that any VAT the trustees incur on administration and other general scheme-related services, used to make the onward taxable supply to the employer, will be deductible by the trustees in full. However, if trustees incur VAT on asset management this has a direct and immediate link to the trustees’ ongoing investment activities, as well as potentially being linked to the supplies made to the employer, and so only a partial deduction may be available to the trustees in respect of VAT incurred by it on those services.
VAT grouping: A corporate pension scheme trustee may be able to join the employer’s VAT group. HMRC confirm that costs of administration and other general scheme services will in this situation be overhead costs of the VAT group, deductible in accordance with the group’s activities as a whole; but where the trustee incurs VAT on asset management services only a partial VAT deduction may be possible by the VAT group.
Corporate trustees have also raised worries about exposure to the joint and several liability that applies to members of a VAT group. HMRC re-iterates that it is “unable to recover VAT from the scheme assets except to the extent that the relevant VAT debt is attributable to the administration and operations of the pension scheme”.
HMRC’s previous Brief said that employers were free to move to the new VAT regime should they wish to do so. However, many employers (and trustees) may still feel that they do not yet have sufficient information.
As if to emphasise this, today’s Brief concludes by saying that HMRC continues to consider recent representations made to it, including whether alternative tripartite structures might enable a corporation tax deduction in relation to asset management services. HMRC promises further guidance later in 2016.
The Brief can be found here: https://www.gov.uk/government/publications/revenue-and-customs-brief-17-2015-deduction-of-vat-on-pension-fund-management-costs/revenue-and-customs-brief-1715-deduction-of-vat-on-pension-fund-management-costs