HMRC has published two pieces of guidance in connection with VAT and funded pension schemes, following two recently heard cases in the Court of European Justice (CJEU):

  • Brief 43 follows the case of PPG Holdings BV (PPG) (C-26/12) and concerns Defined Benefit (DB) schemes.  

    An employer will now be able to potentially deduct VAT incurred on investment-related services, in addition to administration supplies.

    The previous position had been that employers could only deduct VAT incurred in connection with set up and basic administration costs.
  • Brief 44 follows the ATP Pension Services (C-464/12) and concerns Defined Contribution (DC) schemes.

All supplies directly attributable to the operation of the pension fund (i.e. administration and investment supplies) are now potentially exempt from VAT.

The previous position was that only certain investment supplies were exempt, as a consequence of being classified as insurance products.

Consequences for DB and DC pension schemes

  1. HMRC have posited the notion of employers reclaiming VAT from third party administrators. However, in practice, there are considerable obstacles to this, which make it an unlikely option for schemes.
  2. DB schemes must be aware that in order to benefit from the new ruling, it must be shown that the investment services relate to the employer, rather than the pension scheme. Therefore it is advisable for the scheme employer to:
  1. become a party to the contract for the provision of those investment services. Since trustees would usually contract with third parties in these contracts, it may be advantageous to review the existing investment contracts and consider adding the employer as a party to them;
  2. ensure that it is responsible for paying for the investment supplies (although HMRC have not resolutely confirmed this, they have indicated that ‘payment is an important factor’ in assessing this); and
  3. ensure that it is does not recharge the cost to trustees.  
  1. The concessionary 30/70 split (which is applicable where a single invoice is issued in connection with the provision of both administration and investment supplies respectively) will end on 31 December 2015. However, it can continue as a transitional easement up to that date.
  2.  Although administration supplies relating to DC pension funds are now exempt; they are not exempt for DB pension funds.
  3. HMRC has not defined the type of ‘general administration supplies’ covered by the new exemption. It is thought that this will be confined to very specific costs associated with pooled pension funds, as opposed to the majority of administration services provided by third party administrators. However, we will have to keep a close watch over how this is interpreted by HMRC.

In view of the complicated nature of the revised guidance, and in particular the different applications to DB and DC schemes, we suggest that trustees obtain early advice from their advisers. This is to ensure that the changes are implemented to the scheme, where necessary.