HMRC has announced it is looking again at the VAT treatment  of services to DB and DC pension schemes, including  investment management. This is welcome news for employers  and trustees.

HMRC will issue new guidance in the autumn covering both  types of scheme.

We recommend employers and trustees consider making  protective claims now for any overpaid VAT to prevent currently  eligible claims becoming time barred.

HMRC sets out its new position in Brief 22/14: http://www. hmrc.gov.uk/briefs/vat/brief2214.htm.

The European Court’s (CJEU) decisions in the PPG case and  the ATP case brought the VAT issue to life. Both decisions ask  questions of the stance HMRC has taken in the past.

DB schemes

The main issue with DB schemes is VAT on investment  management services. The PPG case suggested this might be  recoverable.

In the past, HMRC has accepted that, with appropriate  billing arrangements, the employer could recover VAT on the  administration element of an investment management service.  For simplicity it allowed an assumption that 30% of the cost  was for administration. But it denied recovery in relation to the  investment management element (70%).

Pending the new guidance, employers and trustees can carry  on with the approach they have used in the past, including the  30/70 split. See HMRC’s original bulletin (Brief 06/14) for these  transitional arrangements which now continue until the autumn:  http://www.hmrc.gov.uk/briefs/vat/brief0614.htm

For the long term, this Brief outlined tighter conditions for VAT  recovery than in the past. This interpretation of the PPG case  prompted extensive comment from the pensions industry,  contributing to the current reconsideration.

For more detail about the original proposal for the future, see  the box below.

DC schemes

In the ATP case the CJEU held that certain administrative  services (including some linked to investment) in relation to DC  schemes can qualify for exemption from VAT. This could mean  employers and trustees have paid VAT that was not due. So  far, HMRC has not published any response to this case. The  question the industry wants an answer to is: what categories  of service will HMRC recognise as falling within the exemptions  found to apply in the ATP case? The autumn guidance needs  to cover this.

DC schemes may also be able to rely on the PPG case.

Reclaiming VAT

Uncertainty about the future means now is the time for  employers and trustees who have incurred a VAT expense in  respect of the administration and/or investment management of  a DB or DC occupational pension scheme to consider making  a claim to HMRC for the tax incurred.

However, note that Brief 06/14 (under Claims and Retrospective  Action) cautions that where 30/70 has been applied, a claim  would mean recalculating the amounts of tax proper to employer  and trustees. Depending on the facts of any particular case, that  could mean the employer or trustees owe extra tax. A cost/ benefit analysis needs to be done before any claim is made.

According to whether a scheme is DB or DC and to the service  in question, a claim may relate to input tax or output tax.

Pending the autumn guidance, we recommend consideration  is given to making protective claims now to prevent currently  eligible claims becoming time barred. A claim should include  the following:

  • „„name and contact details of the employer and the trustees,
  • „„name and type of scheme, „
  • the employer’s VAT registration number (and/or any VAT  registration number of the trustees),„
  • the nature of the expenses to which the reclaim relates, „
  • the period of time over which the claim is made,
  • any readily available details of the expenses in question,including an estimate of the amount where possible,
  • a statement that full particulars will follow and the amount may be amended as the full details of the claim are  specified and
  • a claim to compound interest.

Where a claim is for output tax wrongly paid (in relation to a DC  scheme, say), it is likely to be best to try to have the supplier  join in the claim.

VAT legislation says claims may only be made in respect of the  previous four years but, in some circumstances, it is possible to  extend this. Initially claims should therefore be made in respect  of all prior periods.

As the above indicates, thought needs to be given before a  claim is made. Burges Salmon’s team of tax specialists would  be pleased to help.

PPG case: HMRC’s initial position

In Brief 06/14, HMRC’s reading of the PPG case was that  an employer would be able to recover VAT on investment  management services to its DB scheme only if:

  • they included an administration element as well as  investment and
  • they were supplied to the employer. Indicators  for this would include whether the contract for the  supply was with the employer and whether the  employer paid for it.

Further, HMRC insisted the cost must remain with  the employer. If the cost was passed on to the  scheme (e.g. by reimbursement or deduction from  contributions), the employer would be liable for VAT  on that transaction. It appears the same might apply  where the cost of other scheme-related services  supplied to the employer was passed on.  This position is now being reconsidered.