HMRC has updated its policy on the ability of employers to recover VAT paid in respect of defined benefit pension scheme administration and investment management costs following the decision of the Court of Justice of the European Union in July 2013 in Fiscale eenheid PPG Holdings BV cs te Hoogezand v Inspecteur van de Belastingdienst/Noord/kantoor Groningen (“PPG Holdings”). In that case, it was held, that an employer who establishes 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.
HMRC’s previous policy
The previous policy distinguished 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).
The new policy
The new policy focuses on whether there is a direct and immediate link between the supply received by the employer and the taxable supplies the business makes. If there is such a link, VAT will be recoverable by the employer.
HMRC will not, however, permit an employer to deduct VAT incurred:
- in relation to pension fund management and administration where the supplies were not made to the employer; or
- where the supply is limited to investment management services only. (The specific costs of investment management will have a direct and immediate link to the supplies of the investments. VAT in respect of these supplies will be recoverable by the pension fund, not by the employer.) However, where the services received go further than the management of the investments .i.e. the services are for investment and administration, they may be general costs and provided the services are made to the employer, VAT will be recoverable.
The new policy has effect from 3 February 2014 but transitional provisions apply whereby until six months from then, employers and pension funds may agree to a 30/70 split of VAT as previously.
HMRC has stated it does not intend to take any action where employers claimed deductions in accordance with the old policy, but the “direct and immediate link” criteria under the new policy would not have been met.
Employers should review the arrangements for paying for investment and administration services to ensure these are structured in a tax efficient way in accordance with HMRC’s revised policy.
That said, there are some aspects of the policy that are not clear. For instance, how HMRC will deem that supplies were not made to the employer. HMRC has said it will consider whether the employer has commissioned and paid for the services, but its consideration will not be limited to these factors. HMRC has stated it will update the section of the VAT Guide (Notice 700/17), which deals with funded pension schemes, shortly. It is hoped that further guidance will be given on this issue.
Businesses which received supplies of services meeting the new criteria before 3 February 2014 are entitled to claim a refund of any input VAT which has not previously been claimed. Employers should therefore consider doing so. Under the normal “capping rules”, any claims for repayment will not, however, be considered for periods ending more than four years before the date on which the claim is made.