HMRC has issued a new Brief on employers’ ability to recover VAT in relation to fund management services provided to defined benefit pension schemes. The Brief sets out the minimum terms required in a tripartite contract between the fund manager, the trustees and the employer in order for the employer to recover VAT on the fund management services.
Until relatively recently, and as set out in its VAT Notice 700/17, HMRC took the view that investment by trustees of a DB occupational pension scheme was not part of the employer’s business and so employers could not claim input tax on the costs of managing those investments. In the PPG case in 2013, the CJEU challenged HMRC’s line by finding that an employer could deduct VAT paid on services supplied to a scheme, whether administration or fund management, so long as there was a “direct and immediate link” between those services and the employer’s own supplies.
In a Brief issued in November, HMRC broadly accepted that an employer could potentially deduct input tax so long as it and not the pension scheme was the recipient of the supply of services. However, it went on to say that it would not accept that VAT incurred in relation to a scheme was deductible by an employer “unless there is contemporaneous evidence that the services are provided to the employer and, in particular, the employer is a party to the contract for those services and has paid for them.” In practice, of course, this means that those contracts (typically between the trustees and service provider) become tripartite.
Following informal consultation with industry, the Brief sets out specific minimum requirements to be met by such tripartite contracts. These include the following:
- the service provider must make its supplies to the employer (although the contract may recognise that, in the occupational pension scheme regulatory context, the provider is appointed by the trustees);
- the employer must pay directly (not through the pension scheme) for the services that are supplied and be issued with a valid VAT invoice for its full cost;
- the service provider must pursue the employer for payment and only where the employer is unlikely to pay can it recover its fees from the scheme instead;
- the employer and trustees must both be entitled to bring legal action against the provider for breach of contract, although the provider’s liability need not be greater than if the contract were only with the trustees;
- the provider must issue fund performance reports to the employer on request (although the trustees can retain a power to withhold such reports in certain circumstances); and
- the employer must be entitled to terminate the contract, although that right can be subject to trustee consent.
If the employer tries to recharge the scheme for the fund management fees, that will be treated as a supply by the employer and so VAT would have to be added. However, HMRC accept that trustees can amend schedules of contributions to give credit to the employer for the fees which it pays direct to the fund manager.
Note that the new approach is not (yet) compulsory: HMRC say that until 31 December 2015, employers may continue to use the VAT treatment outlined in the existing (pre-PPG) VAT Notice, so long as the trustees agree. Our understanding is that this transitional arrangement applies to all services which came within the previous VAT Notice, not just fund management services.
Outstanding areas of uncertainty
The Brief is not the last word on this increasingly tangled topic. HMRC promises that it will provide further guidance “in the summer” on the impact of PPG on VAT recoverability as it relates to:
- other services supplied to schemes e.g. legal, actuarial and accounting;
- defined contribution and hybrid schemes;
- VAT groups that include a corporate trustee and a sponsoring employer; and
- trustees that charge employers to run their schemes.
The Brief also does not cover the scope of the VAT exemption which applies to defined contribution schemes following the ATP case. We expect further guidance from HMRC in the summer regarding which schemes and which services come within the scope of that exemption.
The clarification provided by the Brief will be welcomed by parties considering new contractual arrangements for fund management services following the PPG decision. Employers and trustees can now take steps to put in place tripartite contracts with an understanding of what HMRC require. Employers and trustees that have already put tripartite arrangements in place may now wish to review them against HMRC’s new, more detailed criteria.
The Brief can be found at: https://www.gov.uk/government/publications/revenue-and-customs-brief-8-2015-deduction-of-vat-on-pension-fund-management-costs/revenue-and-customs-brief-8-2015-deduction-of-vat-on-pension-fund-management-costs