Top of the agenda
1. HMRC issues revised guidance on recovery of VAT on administration and investment management services provided to pension schemes
HMRC has issued revised guidance on the ability of employers to recover VAT on administration and investment management services provided in respect of defined benefit and defined contribution pension schemes, particularly in light of recent decisions of the Court of Justice of the European Union in this area.
Defined benefit schemes
- In the past, HMRC’s policy has been to distinguish between VAT incurred in relation to:
- the establishing and day to day administration of occupational pension funds (which was recoverable by the employer); and
- management of the investment activities of the fund (which was not recoverable by the employer).
Where a service provider issued an invoice which covered both the administration of the pension fund and the management of the fund’s investments, the employer could claim 30% of the VAT (as relating to general management of the scheme) and the pension fund the remaining 70% of the VAT (as relating to investment management). This applied irrespective of whether the services were provided to the employer or the trustees.
In July 2013, the Court of Justice of the European Union ruled in Fiscale eenheid PPG Holdings BV cs te Hoogezand v Inspecteur van de Belastingdienst/Noord/kantoor Groningen that an employer with a legally and fiscally separate pension fund may deduct VAT paid on services relating to the management and operation of the fund if there is a direct and immediate link between the purchase of the services for the pension fund and employer’s taxable activity. For our update on that decision, click here.
Following the European court’s decision, HMRC issued guidance on its policy on the recovery of VAT by employers of DB schemes in February 2014. For our update on the guidance, click here. However, the guidance was unclear in many respects and following consultation, HMRC has issued revised guidance clarifying its position.
The revised guidance
The key points from the revised guidance are as follows:
- An employer may only be able to deduct VAT if the services have been provided to the employer – this point was emphasised in HMRC’s February 2014 guidance.
- The current guidance emphasises however, that in practice, whether the services have been supplied to the employer or to the pension scheme through its trustees is a highly fact-sensitive question that would depend upon consideration of all of the circumstances in which the transaction in question took place.
- In particular, HMRC will not accept that VAT incurred in relation to a pension scheme is deductible by the employer unless:
- there is contemporaneous evidence that these services are provided to the employer;
- the employer is a party to the contract for those services;
- the employer has paid for those services.
The guidance also states that where the employer receives a taxable supply of administration and investment management services and recharges them back to the pension scheme, the employer must charge the pension scheme VAT in respect of the amount recharged to the scheme. The scheme may deduct the VAT to the extent that it is engaged in “taxable business activities”.
The new policy has immediate effect but transitional provisions apply whereby until 31 December 2015, pension funds may agree to a 30/70 split of VAT as previously.
Defined contribution schemes
In the case of ATP Pension Service A/S v Skatteministeriet  EUECJ C-464/12ATP, the Court of Justice of the European Union held that ATP, a Danish company, was exempt from paying VAT on fees that it received for providing administration services to its occupational pension fund customers as the service it provided fell within the fund management exemption in article 13(B)(d)(6) of the Sixth VAT Directive. Article 13(B)(d)(6) requires member states to put in place measures to exempt from the payment of VAT “the management of special investment funds as defined by Member States". The Court held that the essential characteristics of a ‘special investment fund’ (SIF) are that:
- the assets of several beneficiaries must be pooled;
- the fund must enable the risk borne by the beneficiaries to be spread over a range of securities.
Looking at the Danish pension fund in question, the Court held that the fund had such features. For our update on that decision, click here.
The revised guidance
HMRC’s guidance states that, in light of the ATP judgment, it now accepts that pension funds that have all of the following characteristics are SIFs for the purposes of the fund management exemption so that the services of managing and administering those funds should be, and always should have been, exempt from VAT:
- they are solely funded (whether directly or indirectly) by persons to whom the retirement benefit is to be paid (ie the pension customers)
- the pension customers bear the investment risk
- the fund contains the pooled contributions of several pension customers
- the risk borne by the pension customers is spread over a range of securities
These features would generally be satisfied by DC schemes although there is some concern that “solely” funded would only cover DC schemes where the employer is not making a contribution. However, this would seem to be inconsistent with the ATP decision (as in that case the employers were making contributions to the scheme). Perhaps by using the term “indirectly”, HMRC mean to cover employer contributions too and we consider that it is likely that DC schemes, where both the employer and the employees are paying contributions, fall within the VAT exemption.
For an employer of a DB scheme to deduct VAT on administration and investment management services, the employer must now satisfy the criteria as set out in HMRC’s recent guidance. However, many pension schemes have investment and management services provided to them directly rather than to the employer. This is the case particularly as an investment fund manager has to be appointed by the trustees under section 47 of the Pensions Act 1995.
It may, therefore, be necessary for schemes to have some form of three-way administration agreement involving both the employer and the trustees and the service provider in order to satisfy HMRC’s criteria. The employer must, under such an agreement, commission the service and pay for the service. Careful consideration must be given in drawing up the agreement, particularly in light of any conflict of interest the trustees of the scheme may have.
Employers that have already accounted for VAT on pension fund management services which now qualify for exemption in accordance with HMRC’s revised policy may be able to claim a refund of any excess VAT paid as a result. Any such claims, however, are subject to the normal capping rules and claims will not be considered by HMRC for periods ending more than four years before the date on which the claim is made. To make a valid claim, employers must be able to produce evidence to demonstrate that they have accounted for VAT on the relevant services and be able to substantiate the amount claimed – HMRC will not accept estimates.
DC schemes that fall within HMRC’s criteria in the revised guidance may be able to claim any VAT paid (subject to the same capping rules going back four years). They will also be exempt from paying VAT going forwards. However, many DC schemes are already exempt from VAT on investment and management services where its assets are invested in an insured pooled investment product.
For further information on the implications of these changes, please speak to your usual contact in the pensions team.
2. Pension Schemes Bill: provisions introduced in relation to transfers of defined benefits to DC or cash balance arrangements
In its response to the “Freedom and choice in pensions” consultation in July this year, the Government confirmed that it would not impose any restrictions on transfers of DB benefits to DC arrangements in the private sector but that certain safeguards would be introduced in relation to such transfers. It also confirmed that transfers from unfunded public sector DB schemes to DC would be banned and that some of the current restrictions on the statutory right to a cash equivalent transfer will be lifted in relation to a transfer of DC benefits. Detailed clauses in relation to these measures have now been introduced in the Pension Schemes Bill.
Trustees to “check” that a member has taken appropriate independent advice
Clauses have been introduced in the Bill, placing a requirement on transferring scheme trustees to “check” that the member has received “appropriate independent advice” before:
- transferring a member (or a survivor’s) DB benefits into the DC or a cash balance arrangement.
- converting a member or survivor’s DB benefits to a DC or cash balance benefit within the same scheme.
Although “appropriate independent advice” will be defined by regulations in due course, during the parliamentary debating sessions, Pensions Minister, Steve Webb explained that this would mean “independent financial advice by a regulated IFA or similar”.
Regulations will also prescribe:
- what the “checking” requirements would entail – "checking”, the Pensions Minister explained, would require trustees to ensure whether or not the member has received independent advice; but would not require looking at what the IFA has said to the member to see if “it is any good or appropriate”;
- when the check must be carried out;
- any exemptions to the requirements i.e. where members have small DB benefits.
- liability for the trustees to a fine if they fail to carry out the checks required – (any member transfer made will not be invalid, however, because of such failure).
Employers may have to pay for appropriate financial advice in certain circumstances
Where members’ DB benefits have been transferred as a result of an employer led transfer exercise, or where there are transfers between the DB and DC sections within the same scheme, the Government’s intention is that the employers should pay for appropriate independent advice for the member in connection with the transfer. A regulation making power has therefore been introduced enabling regulations to be made setting out the circumstances in which employers must pay for advice.
The regulations also enable provisions to be made for placing a cap on the amount that employers will have to pay for the advice on behalf of the member so that the arrangement is fair. On the flip side, a regulation making power has also been introduced for provisions to be made preventing employers from attempting to pass the cost of advice back to members.
These requirements will apply in relation to active as well as deferred members.
Extension to the period within which a cash equivalent transfer may be taken
Under current legislation, the right to a tax equivalent transfer lapses one year before normal retirement date. To ensure the DC flexibility measures “operate as intended”, the provisions of the Pension Schemes Act 1993 relating to rights to a cash equivalent transfer will be amended to enable members with “flexible benefits” (broadly, money purchase or cash balance benefits) to transfer their benefits up to and beyond the scheme’s normal retirement age. These rights will apply at benefit category level rather than at scheme level.
Transfers from public sector DB schemes to DC schemes
Clauses are being introduced restricting transfers from unfunded public service DB schemes to schemes that provide flexible benefits. As previously announced, transfers from funded public sector DB schemes will be allowed.
In relation to converting DB benefits into flexible benefits, the Government had said in its response to the “Freedom and choice in pensions” consultation that it would consult on measures so that DB members will not need to transfer first to a DC scheme in order to access their savings flexibly. Although the much awaited clauses in relation to transfers and conversion of DB benefits have now been introduced, the Government’s consultation on measures allowing DB members to access the flexibility measures internally has still not been issued. The Government’s promised revised guidance on transfers is also awaited.
3. Upper Tribunal holds Desmond documents are not privileged from disclosure
The Upper Tribunal has ruled that company documents held by a former shareholder of a dissolved company are not privileged from disclosure and ordered the shareholder concerned to disclose the documents.
In April 2010, the Determinations Panel issued a determination for Contribution Notices to be issued against two director shareholders of Desmond & Sons Ltd, Mr Desmond and Mr Gordon, requiring them to pay £900,000 and £100,000 respectively into the Desmond & Sons Ltd Pensions & Life Assurance Scheme, a defined benefit pension scheme.
The directors made a reference to the Upper Tribunal against the decision. The trustees of the Desmond scheme also lodged a reference to the Tribunal, arguing among other things that the CN’s should have been for a higher amount and a CN should also have been imposed on a third shareholder, Mrs Desmond. At an interim hearing, the Tribunal held that it was time barred from requiring a CN to be imposed on Mrs Desmonds but that it did have jurisdiction to increase the sum under the CNs imposed on Mr Desmond and Mr Gordon. For our update on that decision, click here.
As part of these on-going proceedings, a case management hearing was held earlier this year before Judge Bishopp. The parties were directed to produce a list of documents on which they would rely, including those that were not privileged from production. A further case management hearing was held before Judge Herrington to hear applications in respect of a claim for privilege by Mr Gordon requesting confirmation whether he was obliged to maintain privilege over any documents in his control passed on to him by the liquidators of Desmond & Sons Limited.
The trustee of the scheme claimed that the documentation retained by Mr Gordon was not privileged and should be disclosed. They argued that privilege could not be asserted as this was a right vested in the Company alone and the Company no longer existed.
Judge Herrington agreed with the trustees that the right to assert privilege rested with the company and that the Company could not assert any right to privilege as it no longer existed. He also noted that reregistration of a company was time barred six years after dissolution and therefore the Company could not be restored in this case. The Judge further explained that Mr Gordon’s fiduciary duties as a former director or obligations under his employment contract to maintain privilege would only have been enforceable until the Company was dissolved. The Company did not exist anymore and therefore could not enforce that contract.
The Judge dismissed the trustee’s remaining arguments, however, including the argument that the Company’s liquidators waived privilege when they passed the documents to Mr Gordon following the completion of the liquidation stating that it would have required very clear wording indicating that Mr Gordon had been released from his duty of confidentiality. In the absence of such wording Mr Gordon should have regarded himself as still bound and his subsequent behaviour evidenced that he did indeed feel so bound. The Judge ordered that documents held by Mr Gordon should be listed as per the original case management directions.
Garvin Trustees v The Pensions Regulator  UKUT B8 (TCC)
4. Trustee’s failure to consult a potential beneficiary about their relationship with the deceased is maladministration
Mr Gooch was the nominated beneficiary for receipt of his wife’s lump sum death benefit. When Mrs Gooch died on 24 January 2009, Mr Gooch informed the trustee of her death and provided the trustee with a copy of the death certificate and Mrs Gooch’s will. The trustees, however, received information from members of Mrs Gooch’s family that there had been a breakdown in the relationship between Mr and Mrs Gooch, that Mrs Gooch had wanted to divorce Mr Gooch and that at the time of Mrs Gooch’s death they had been living apart.
The trustee did not consult with Mr Gooch about this and made a decision not to pay the death benefit to him. When Mr Gooch’s solicitors requested that the trustee provide reasons for not awarding the benefit to Mr Gooch, the trustee declined their request saying that they were under no obligation to give reasons for their decision to Mr Gooch.
Mr Gooch’s solicitors approached TPAS who also asked the trustee for further information in relation to its decision. The trustee promised to respond but never did. In response to a request from the Ombudsman concerning their decision, the trustee responded that it did not have to give its reasons and that in the process of its investigations, it had been made aware of potentially sensitive information; giving its reasons would have had data protection and confidentiality implications.
The Ombudsman concluded that the trustee was guilty of maladministration. It should have questioned Mr Gooch in respect of the allegations that had been made, and should certainly have asked him about the state of his relationship with his wife prior to her death. There would have been no need to disclose any confidential data to Mr Gooch when asking these questions. However, the trustee instead based its decision on partial evidence much of which was untrustworthy and should not have been relied upon.
The Ombudsman directed the trustee to allow Mr Gooch to respond to the allegations made about his relationship with his wife. After receiving Mr Gooch’s evidence the trustee was to make any necessary relevant enquiries and to arrive at a fresh decision in respect of the death benefits. The trustee was also required to record the material used to arrive at the decision and to provide a summary of its reasons to Mr Gooch.
The Ombudsman also said that Mr Gooch had a reasonable expectation that he would receive the benefit and “should, at least, have been given the courtesy of being told that he was not going to receive any”. The Ombudsman further criticised the trustee for its failure to respond to Mr Gooch's queries and directed the trustee to pay £150 to Mr Gooch for the distress and inconvenience he had endured.
It is not uncommon for there to be question marks or objections raised by family members in relation to death benefits payable to a particular beneficiary. However, trustees must make sure that they make further investigations if any such objections are raised and to give the beneficiary an opportunity to give their version of events before deciding whether or not to pay the benefit to the beneficiary.