Employer's ability to recover
HMRC's position on the employer's ability to recover VAT on the cost of fund management and other services to its scheme appears close to being settled substantially as outlined in its Briefs 8/15 and 17/15 last year.
HMRC has circulated draft changes to its VAT manual for comment by a limited audience.
It would be premature for employers or trustees to make decisions until the final version of the changes emerges but the drafts show the likely outcome. However, VAT is based on EU law so it may be that the final text will now be delayed and implementation postponed. If and when final text is published, it should be an agenda item for employers and trustees.
Points on the drafts:
- The current transitional period for existing practices to continue would end on 31 December 2016 as planned. The new rules would apply to services received from 1 January 2017.
- The focus is on DB schemes. In particular, HMRC appears to indicate the tripartite contract approach (see below) would not achieve VAT recovery in a DC scheme.
- HMRC sketches various arrangements that could be adopted, including the trustees registering for VAT, using a corporate trustee that is part of a VAT group and employer supplying services it has received onward to the trustees.
- That said, HMRC evidently expects tripartite contracts to be the popular choice. Here the employer, the service supplier and the trustees are party to the supply agreement. The contract needs to evidence that the service is supplied to the employer and that the employer pays for it directly. Various other criteria need to be met too. HMRC says the employer would not be entitled to a corporation tax deduction on the cost of services if it recovers VAT on them.
Meanwhile, a number of VAT cases that could bear on pension schemes are going through the courts.
The trustee of the United Biscuits scheme is seeking repayment of VAT charged on 40 years of fund management services. One of its arguments is the EU notion of fiscal neutrality ie where the service is similar, tax law should not favour one business structure over another. If schemes that invest in insurance products do not pay VAT, nor should those that use a self-administered portfolio.
The case is stayed at the moment, pending the outcome of an appeal to the Supreme Court in Investment Trust Companies (In Liquidation) v HMRC.
Meanwhile the long-running Wheels case about a common investment fund containing the assets of a number of DB schemes is also stayed.
Overall, it looks likely there will be questions about how VAT applies in relation to pension schemes for a good time yet.