VAT recovery on pension administration and investment management services provided to pension schemes could become more difficult, due to HM Revenue & Customs’ (“HMRC’s”) new guidance, published on and effective from 3 February 2014.
On 3 February 2014, VAT Notice 700/17 was updated to provide new guidance on VAT recovery on pension administration and investment management services provided to pension schemes. Prior to this update, employers were allowed to recover VAT incurred in relation to pension administration services supplied to their pension schemes. Under the same HMRC guidance, VAT was not recoverable by the employer for any investment management services relating to their pension schemes.
HMRC’s guidance had to change after the Court of Justice of the European Union (“CJEU”) published its new judgement in relation to the PPG Holdings BV (Case C-26/12) (“PPG”) case. This ruling specified that an employer which has set up a legally and financially separate pension fund can recover the VAT paid on both pension administration and investment management services, provided there is a direct and immediate link between the services and the employer’s own business.
As such, HMRC is now required to accept that VAT on both the above mentioned services can be deducted by the employer, provided the specified link applies. Consequently, there have been a number of other changes made to HMRC’s guidance on the subject. Firstly, they have abolished the 70%/30% split, whereby if a single invoice was received covering both types of services for the pension fund, the employer could recover 30% of the VAT in relation to the investment management services, and 70% in relation to the pension administration (general management) services. This abolition is bitter-sweet because, while it means there is now no upper limit on the amount of VAT that can be deducted by the employer, it also means there is no lower limit.
Further changes relate to the conditions under which HMRC will now not allow VAT to be recovered by the employer. VAT will not be recoverable when:
- The services were not made to the employer (to be decided by HMRC); and
- The supply is limited to investment management services only and not a combination of both investment management and pension administration services.
The final stipulation is that, if the employer receives the services, but the pension fund bears the cost of said services, VAT is potentially recoverable by the pension fund, but only to the extent that the fund is engaged in taxable business activities (such as commercial property).In order to deduct any such VAT however, the pension schemes are required to be VAT-registered.
HMRC’s new guidance was published on and will take effect from 3 February 2014, but there will be a six month transitional period during which the 70/30 split will still apply for any invoice issued to a pension scheme for both pension administration services and investment management services.
Recommendations on what to do next:
- The guidance is relatively vague and does not give trustees and employers the certainty they may have been expecting after the PPG case.
- Trustees and employers should review their arrangements with existing investment advisers to ensure they are structured in a manner which is most tax efficient given the new guidance.