Despite predictions that the Chancellor would tinker further with the tax of pension schemes, the Budget largely left pension schemes alone, with the confirmation of an increase to the lifetime allowance.
But before the Budget, HMRC was busy with two announcements on the treatment of VAT and pension schemes.
Pension Fund Management Services provided by Insurance Companies
HMRC's policy has been to allow all pension fund management services provided by insurance companies to be exempt from VAT.
A Court of Justice of the European Union (CJEU) decision some time ago made it clear that the VAT exemption for insurers applies only to the underwriting of risk, and not to other supplies made by insurers. UK law was amended in 2005 to remove any link between an insurer’s regulatory status and the entitlement to VAT exemption on its supplies. But insurers were allowed to continue to exempt their supplies of pension fund management services due to ongoing uncertainty concerning the current and future treatment of pension fund management services. It is now clear that there will be no further review of the EU VAT rules in this area before the UK leaves the EU, so HMRC has announced a change in its policy.
From 1 April 2019, insurers will no longer be exempt from charging VAT on the provision of pension fund management services.
However, the practical impact of this change in policy is limited. In 2014, the CJEU ruled in ATP Pension Services that a defined contribution pension scheme could qualify as a special investment fund (SIF) for the purposes of the VAT exemption for fund management services. HMRC believes that the great majority of pension fund management services provided by insurers are supplied to defined contribution pension schemes and therefore qualify (and have always qualified) for exemption as SIFs following the judgment in ATP.
Input VAT on management of defined benefit pension schemes: HMRC guidance
In 2013, the CJEU ruled in PPG that VAT charged on management services provided to a pension fund could be deducted by the employer that had established the pension fund and paid for the services, provided there was a direct and immediate link between the services and the employer's economic activities as a whole.
Before this decision, HMRC had accepted that employers could deduct VAT incurred in establishing a scheme and day-to-day administration, but not for investment services (as HMRC considered that they were no part of the employer's business). VAT could be deducted even if the trustees paid for the services, provided the invoice was issued to the employer. Where combined administration and investment services were provided, a single invoice could be provided with 30% deemed as administrative services for which VAT could be deducted (commonly referred to as 70/30 split).
Following PPG, HMRC announced that the 70/30 split would be withdrawn after a transitional period ending on 31 December 2017. Employers could potentially deduct VAT incurred on both administration and investment services - provided that the employer was the recipient of those services. But this presents a problem because it is the trustees who are usually the recipient of the services.
HMRC has updated its guidance and has dropped the 31 December 2017 end date for the transitional period, without any new date being set.
HMRC's position is that VAT can be recovered:
- Where the trustees are the recipient of the services, the employer can recover VAT on administration services, but not investment services.Combined services can continue to be treated on the basis of the 70/30 split
- Where there is a tripartite contract between the trustees, employer and third party provider.But this is not a perfect solution as it can cause tension with pension regulations and conflicts of interest.
- Where scheme trustees supply management services to the employer. However, HMRC considers that investment costs would be incurred for the trustees' supplies to the employer and also for the trustees' ongoing investment activities and the VAT deduction would have to be apportioned to reflect the dual use.
- By including a corporate trustee within the employer's VAT group. HMRC has confirmed that the joint and several liability provisions for VAT grouping would not entitle HMRC to recover VAT from scheme assets, except to the extent that the relevant VAT debt is attributable to the administration and operations of the scheme.
The announcement therefore continues the current VAT treatment beyond the end of the year. None of these solutions is perfect, but it may not be too long before the guidance is looked at again. Judgment is expected soon in the United Biscuits case – where the trustee company is seeking VAT recovery on 40 years of management services - and there are two further VAT cases pending before the Courts. So the VAT treatment of pension schemes will remain a live issue for some time to come.