In previous editions of our pensions publications and indeed in the last edition of pension priorities we reported on the most recent developments in relation to VAT and pension schemes. This has been an area of shifting sands particularly as the issue has been challenged in Europe, putting pressure on the UK tax authority (HMRC) to change its practices accordingly.
Reclaiming VAT – HMRC's position
The policy up until February 2014 was that HMRC distinguished between set up and administration costs and investment costs of a pension scheme, with the first being tax deductible by the employer (as a business expense) and the second not, being a cost of the scheme. Invoices that covered both were split 30/70, by which only 30% was tax deductible. Following the decision in the PPG case (see our previous article on this) in February last year, HMRC responded by replacing its existing policy in relation to invoices covering both areas, so that VAT could be reclaimed on these, so long as the supplies were made to the employer, but retained the tax in relation to investment-only invoices.
Then in November 2014, following consultation with the industry, HMRC issued a replacement policy paper (Brief 43) which stated that the distinction between investment and set up/administration costs would no longer be used (although schemes could make use of a transitional period of the original position, now extended to December 2015).
As a result, VAT will now be able to be reclaimed by employers where the services were provided to the employer, rather than to the scheme. For this to be shown, HMRC is demanding contemporaneous evidence that the services were provided to the employer. Since the services are to the scheme, this may be difficult to show, but HMRC's policy suggests that they may well be satisfied if the employer is a party to the contract and paid for the services itself (though note our comments below about HMRC's recent update).
VAT & DC Schemes
The ATP case (ATP Pension Service (Advocate General's opinion)  EUECJ C-464/12 (12) held that a defined contribution arrangement was a Special Investment Fund (SIF) and therefore exempt from VAT (see also our articles on this in previous editions of Pensions Pieces). On 25 November 2014 HMRC also issued a second Brief (2014/44) in which it confirmed that it now accepted that VAT is not chargeable on services to any pension arrangement where the arrangement is solely funded by the people to whom the benefit is paid (including indirect employer funding which is generally regarded as inlcuding employer contributions paid in the context of the employment relationship), the customer bears the pension risk (as in a money purchase arrangement), the fund is pooled and is spread over several different investments. HMRC now accept this position and that such arrangements are VAT exempt, but only in respect of services provided solely to such arrangements.
The effect of these changes
This will have a significant effect for many pension schemes and indeed, there is also an ability to reclaim overpaid VAT and schemes may wish to consider whether they can do this. The problem of schemes not being VAT registered (as they do not carry out a business) and therefore unable to reclaim VAT has been a very significant one. The situation is most beneficial for pure money purchase schemes and they will need to ensure that they obtain their own supplies of services directly if services are to be provided on a VAT exempt basis. Other schemes may wish to make use, where possible, of Brief 43 (2014), in relation to which HMRC has recently issued an update (Brief 8 (2015),-published on 26 March). In that, HMRC has said that it recognises that in defined benefit pension schemes the employer ultimately bears the financial risks and benefits and that the pension fund management services provided to the pension scheme benefit the employer also. It has, therefore, said that in relation to DB schemes only, it is prepared to accept tripartite agreements between the employer, trustees and the supplier of pension fund management services as meeting the requirement that the employer must contract for the services as long as that agreement contains certain provisions. These include that the supplier provides its services to the employer (though the agreement may recognise that in the particular regulatory context in which DB schemes operate, the supplier may be appointed by, or on behalf of the trustees.) It is, however, crucial that the trustees are also the recipients of the supplies and the contracting party so that they can take any enforcement action in relation to the agreement, if necessary, on behalf of the scheme. Care, and legal advice should be taken in drafting wording in agreements to deal with this and the other provisions of the agreement which HMRC has specified in this context, to avoid potential practical and other issues inadvertently arising in any new wording.
HMRC has also said in its recent brief that it has received enquiries in respect of the impact of the PPG decision in relation to other types of service (e.g. legal, actuarial and accounting services), other types of pension schemes (such as defined contribution and hybrid), VAT Groups that include a corporate trustee and a sponsoring employer and trustees that charge employers to run their pension schemes. It has said that it has been discussing these areas with interested parties and intends to provide further guidance in the summer.