In our update for September 2013, we reported  on the case of Fiscale eenheid PPG Holdings BV cs te Hoogezand v Inspecteur van de Belastingdienst/Noord/kantoor Gronigen (the PPG case), which concerned input VAT recovery in relation to costs incurred by the employer, PPG, for the benefit of its own pension scheme.

In response to the judgment of the Court of Justice of the European Union in the PPG case, HMRC has announced that it will tighten its treatment of VAT deductions on pension fund management costs. The policy change is effective from 3 February 2014, with a six month optional transitional period available in relation to the existing 70/30 split applying to VAT on investment management costs and those relating to VAT on general management.

Under HMRC’s 70/30 treatment, where a single invoice was received by scheme trustees governing costs for services in relation to the scheme’s general management combined with its investment management costs, employers could claim 30 per cent of the VAT relating to general management, and the scheme could claim 70 per cent of the VAT relating to investment management.

Under HMRC’s new policy, an employer must establish a direct and immediate link between the supply received and the supply made, in order to deduct VAT on the charge made on its own supplies.

This means:

the general management costs of running a scheme are likely to be VAT deductible, but only where the supplies are made directly to the employer; and

investment management costs will not generally be VAT deductible by the employer, as HMRC’s view is that the costs have a direct and immediate link to the investment itself, and not to the general costs of the employer.

Although there is a period of grace during the transition period, the change may ultimately make many schemes and/or employers worse off, since the direct link could be difficult to establish and may be less beneficial overall that the 70/30 split.

See HMRC’s online brief.