HMRC’s Revenue and Customs Brief 17/15 published on 26 October 2015 sets out HMRC’s latest position on recovery of input VAT on management services provided to defined benefit pension funds. It follows on from Brief 8/15 published in March and Brief 43/14 published last November.
Key points are:
- There is a 12-month extension to the transitional period during which employer groups can continue to recover VAT on administration services (including legal and actuarial services), and to use the ‘70:30’ concessionary method for single invoices covering both administration and investment management services outlined in VAT Notice 700/17. This period now runs to 31 December 2016.
- Employers may therefore keep their existing arrangements in place beyond 31 December 2015 in the knowledge that the VAT treatment will not change on this date.
- HMRC respond to questions raised by the tax and pensions community as to whether the use of ‘tripartite’ agreements to enable input VAT recovery (as contemplated by Brief 8/15) would deprive employers of corporation tax deductions. HMRC’s view is that, where an employer pays directly for asset management costs under a tripartite contract, the employer is not entitled to a corporation tax deduction. There is a strong sense from the latest Brief that this conclusion has sent HMRC back to the drawing board on tripartite agreements.
- HMRC also consider alternatives to tripartite arrangements, but these are not straightforward.
- There is no “one size fits all” clear-cut best practice to follow. What will provide the best result will turn on each employer group’s particular circumstances and, for now, waiting for the promised further guidance and relying on the extension of the transitional period may be the best course of action.
The remainder of this briefing focuses on the options that HMRC’s Brief considers for periods after the end of the transitional period on 31 December 2016. Whilst the extension of the transitional period is welcome, the delay in finding a workable solution is unhelpful: employers still do not have a straightforward route for recovery of the input VAT incurred in relation to investment management services.
Background and PPG
HMRC’s proposals on this first came in response to the Dutch case,
Fiscale PPG Holdings BV cs te hoogezand
(Case C – 26/12) (PPG), in which the CJEU held that the taxpayer was entitled to recover input VAT on pension fund management services (i.e. both administration and investment management services) on the basis that these constituted overheads of the group’s overall business.
Brief 43/14 set out HMRC’s initial response allowing, in line with the facts in PPG, for input VAT recovery on both administration and management services as long as the services are provided to the employer and the employer is a party to the contract for those services and has paid for them. Brief 8/15 then attempted to address concerns as to what kind of agreement might achieve this, recognising that pension fund trustees need to be party to the relevant services contracts for regulatory reasons. HMRC raised the prospect of a ‘tripartite agreement’ between trustee, employer and service provider. In doing so, HMRC broadly agreed that, if an employer is party to the contract, is issued with a VAT invoice for the full cost of the supply and pays the service provider directly for the full cost of the services, it can recover input VAT on both administration and fund management services (depending, of course, on its own level of VAT recovery).
The tripartite contract approach gives rise to a number of practical issues. First, for a trustee’s legal or actuarial advisers, it would arguably be inconsistent with their professional duties to the trustee to enter into a contract with both the trustee and the employer. Secondly, in the context of multi-employer schemes, it may be difficult for unconnected employers in unsegregated schemes all to enter into the same tripartite contract with a supplier to the trustee.
The other key question was what the implications of a tripartite contract would be for the employer’s corporation tax deductions, concerns having been flagged to HMRC that payments made directly to the service provider by the employer might not constitute deductible contributions in view of section 200 of the Finance Act 2004. In this latest Brief, HMRC set out a view that, effectively, any corporation tax deduction in respect of payments under a tripartite contact is limited to a deduction on general grounds for costs recognised in the profit and loss account. HMRC seem to contemplate that whilst general administrative costs may be reflected in the profit and loss account, direct payment by an employer of investment management costs would not be, so that, where an employer pays directly for the asset management costs of the trustee or the scheme under a tripartite contact, HMRC’s view is that the employer will not be entitled to a corporation tax deduction in respect of that element. It is to be hoped that the next round of guidance will provide more here.
The Brief notes that HMRC are continuing to consider representations and whether there are alternative tripartite structures which would enable a corporation tax deduction. HMRC anticipate publishing further guidance later this year.
Alternatives to tripartite structures
For the interim, the Brief mentions two structures as alternatives to tripartite agreements in the context of enabling employers to deduct input tax on pension fund management costs. Neither of these proposals offers a straightforward route in practice, and in the Brief HMRC frame these as options put forward by advisers and representative bodies, rather than giving them a ringing endorsement. HMRC are continuing to work with representative bodies and to seek informal views on potential structures ahead of the promised further guidance.
Supply of scheme administration services by pension trustees to an employerThe first is the supply of scheme administration services by pension trustees to the employer, creating a taxable supply by the trustee to the employer and so enabling input VAT recovery:
- by the employer in respect of that service cost; and
- by the trustee in respect of VAT incurred by it in making that taxable supply to the employer.
HMRC note that, if the asset management services on which the trustee incurs VAT are not used solely in making supplies to the employer, any input VAT deduction would need to reflect this. The impact of this point may turn on the detailed nature of the service being provided by the trustee to the employer group. The implications of this arrangement for the availability of a corporation tax deduction for the employer are not discussed and may not be straightforward.
VAT GroupingThis approach would rely on the VAT grouping of a corporate trustee and the employer, so that supplies made to the trustee are treated as being made to the representative member of that group for VAT purposes. Administration costs that do not have a direct and immediate link to the management of assets would be deductible as overheads in accordance with the group’s overall recoverability position. VAT incurred on asset management services would have a direct and immediate link to the trustee’s investment activity. HMRC acknowledge that it may also have a direct and immediate link to the taxable supplies made by the employer, thereby potentially enabling at least partial recovery on the basis of an apportionment reflecting this dual use. The implications for corporation tax are not discussed but, absent clear guidance, the expectation must be that the trustee is put in funds to make payments via contributions to the scheme in order to provide an employer deduction.
Whilst some pension trustees are registered for VAT (for example, where they invest in real estate and an option tax is exercised in relation to a lettings business, or where they receive services from overseas and are required to account for VAT under the reverse charge mechanism), the majority are not. The grouping structure may appear unattractive for the corporate trustee given the joint and several liability of members of a VAT group: it might raise concerns that HMRC could seek to meet the employer’s group’s VAT liability using scheme assets. However, HMRC has offered reassurance in the Brief that they do not consider that they are entitled to recover VAT from the scheme assets except to the extent that the VAT is attributable to the administration and operations of the pension scheme. In the light of this, corporate trustees may be comfortable with joining the employer’s VAT group, perhaps taking comfort from an indemnity from another company in the VAT group against any VAT liability. Scheme rules might need to be amended to ensure that scheme assets cannot be used to meet any VAT claim against the trustee company.
The VAT grouping proposal will be unworkable for those schemes whose trustees are individuals unless the trustee structure is changed to a corporate trustee.
The time extension was necessary and is welcomed. The proposals on alternatives to tripartite arrangements may be helpful in some specific circumstances but do not provide a solution more generally. The question of corporation tax deductibility continues to be the elephant in the room and it is difficult to see how employers and trustees can sensibly move to make changes until there has been further joined-up thinking on this from HMRC.