As many will have heard, on 26 October 2015 HMRC published its fifth Revenue and Customs Brief (RCB) on the thorny topic of VAT on pension scheme costs (see RCB 17/15: deduction of VAT on pension fund management costs). The welcome news is that the transitional period has been extended by 12 months to 31 December 2016.
However, although the extension of the transitional period is to be welcomed, it should not be seen as an opportunity to shelve the issue until later. Pension scheme trustees and sponsoring employers need to actively consider two key issues now:
- how any decisions they make or agreements they enter into now may impact VAT recovery after 31 December 2016 (for example, how scheme expenses are dealt with in a schedule of contributions and recovery plan entered into before 31 December 2016 may impact successful VAT recovery or corporation tax deductibility after that date), and
- how they are going to implement the necessary changes to ensure that they maximise VAT recovery.
Eversheds’ VAT and pensions law experts have continued to be actively involved in the discussions with various interested bodies and HMRC throughout this year. What has become clear is that there is not going to be a “one size fits all” solution to enable easy VAT recovery.
We will be holding a seminar on Monday 18 January 2016 to explore the issues in more detail and make it easier for pension schemes and employers to make the right decision. Those involved in the VAT policy from HMRC have kindly agreed to speak at this event. We plan to circulate invitations and further details next month.
In the meantime, RCB 17/15 has set out three options that HMRC is currently considering. There may be more guidance in the coming months but we have summarised the current position in this briefing.
The decision of the Court of Justice of the European Union in Case C-26/12 Fiscale Eenheid PPG Holdings BV cs te Hoogezand (PPG), given on 18 July 2013 caused HMRC to rethink its policy on VAT and pension funds set out in Notice 700/17 (which describes the current 70:30 split approach). More than two years after this judgment, the position for pension funds and employers is still not clear (for more background information see our previous speedbriefs here and here). As a result HMRC has announced that it will extend the transitional period allowing employers and pension schemes to rely on the guidance set out in Notice 700/17 until 31 December 2016.
What HMRC has made clear is that in order for an employer to recover any VAT payable on the cost of running an occupational pension scheme, that employer must both contract for and pay for the services. However, pensions law requires that certain services are procured by the trustees of the pension scheme rather than the sponsoring employer. Accordingly, it is not straightforward for the employer to recover the VAT payable on pension scheme costs. HMRC has been considering various possible solutions (listed below) to mitigate the VAT costs of running a pension scheme and in this latest RCB, HMRC has set out its view on how these would operate.
In RCB 8/15 (26 March 2015), HMRC set out that it would allow an employer to recover VAT paid by it as part of a tripartite contract between it, the pension scheme trustees of a defined benefit pension scheme and a pension fund manager or administrator. That RCB set out detailed guidance as to the form of such a tripartite contract. In this latest RCB, HMRC has announced that although an employer can recover the VAT payable under such a tripartite contract, in its view direct payment of asset management costs by an employer does not clearly fall within the sponsoring employer’s profit and loss account or contributions to a pension scheme and therefore will not attract a deduction for corporation tax purposes.
Scheme administration services provided by the scheme trustees to the employer
In this alternative, which does not require the use of tripartite contracts, a VAT registered pension scheme itself provides scheme administration services to the sponsoring employer. This service is subject to VAT and the VAT on it is recoverable by the employer, subject to the usual rules on input tax deduction. The VAT registered pension scheme is entitled to recover, in full, the VAT that it pays on administration and general scheme related expenses (including legal, audit or actuarial services), which are used by the trustees to make the onward VATable supply to the employer. However, HMRC has pointed out that VAT payable on asset management services will not be recoverable in full. This is because the input tax on these will relate to both taxable supplies made by the employer and to any VAT exempt supplies made by the pension scheme trustee as part of its investment activities.
This option may be suitable if there is a corporate trustee of a pension scheme that is eligible to be VAT grouped with the sponsoring employer. In this instance, any supplies made by the corporate trustee, including dealing in the assets of the fund, are deemed to be made by the VAT group representative member. HMRC has said in this latest RCB that the cost of administration and other general scheme related services that do not have a direct and immediate link to the management of a pension scheme’s assets, and therefore the scheme’s investment activity, will be overhead costs of the VAT group and will be deductible in accordance with the usual VAT deduction rules. Again, any VAT payable on asset management services that has a direct and immediate link to the trustee’s VAT exempt investment activity and potentially to the VAT group’s overhead costs will only be partly recoverable according to partial exemption rules.
HMRC has confirmed that its position remains that it is unable to recover VAT from scheme assets under the statutory provisions concerning joint and several liability of VAT group members, except to the extent that the relevant VAT debt is attributable to the administration and operations of the pension scheme.
Pension schemes and sponsoring employers will welcome the extended transitional period, but careful thought will now have to be given as to how best to mitigate the VAT costs of running a pension scheme, whether that is a defined benefit scheme, defined contribution scheme or some other variation. It is clear that there is not one easy solution to the VAT and corporation tax issues that have arisen. HMRC has said it will issue further guidance later this year, which may set out a possible solution to the corporation tax issues.
What is clear is that both the employers and pensions scheme trustees need to be actively thinking about the VAT payable on all costs of running the pension scheme and how best to mitigate that VAT. This may include having to consider now the effect of agreements the trustees may enter into before 31 December 2016 on VAT recovery before and after 31 December 2016.
It may be that the options set out above will suffice for some pension schemes while others may need to explore hybrids or indeed other potential solutions. HMRC has worked hard to try and mitigate the VAT costs of running a pension scheme, but each pension scheme and employer will have to think carefully about how it should proceed to ensure that it does not fall into any tax or pensions law traps. In many cases it may be beneficial to make the changes sooner, rather than to wait until the end of next year when the transitional period ends.