Changes of policy announced in late November 2014 will affect VAT recovery for employer sponsors of occupational pension schemes for their staff. In some cases, refunds of VAT paid in the past will be available, but for some businesses, the new policy will mean that VAT recovery will be restricted and future costs in connection with their pension schemes will increase.
Pension fund management costs: a double-edged sword
The UK tax authorities (HMRC) have confirmed the removal of the 70/30 split for recovery of VAT on pension scheme administration and investment management costs. Historically, employers were allowed to deduct VAT on fees for the administration of occupational pension schemes, but not on fees relating to investment management, which were treated as relating solely to the activities of the pension scheme. If a single invoice was issued, HMRC allowed a notional 70/30 split, with VAT only recoverable on the 30 percent attributable to administration.
Following the European Court (CJEU) decision PPG, HMRC have confirmed that they will allow employers to deduct VAT for the costs of both administration and fund management services provided that they can demonstrate a direct and immediate link between those costs and their business as a whole. This means that to get full recovery, employers must be a party to the contract for the services, have paid for the services and have been issued with a valid VAT invoice for them. The new guidance follows an earlier announcement about thePPG decision in which HMRC indicated that there would be a transitional period to enable businesses to adapt to the new policy. This means that the 70/30 split will no longer be available, although it can continue to be used until 31 December 2015.
Employers should review their contractual position with their pension scheme administrators where the same firm is providing investment management services to ensure that they are entitled to recovery (and should consider whether any claim is available for the past). HMRC's announcement is something of a double-edged sword, however. An employer must charge VAT on any reimbursement by the pension scheme of administration and investment management costs (including, it would seem, set-off against future pension contributions), and in most cases the pension scheme will be unable to recover this VAT. The announcement might therefore be a pyrrhic victory for pension schemes, and could lead to an increased VAT cost.
Levelling the playing field for defined contribution schemes
HMRC have also announced that defined contribution pension funds which have certain characteristics can be special investment funds, such that management and administration fees are (and always have been) VAT exempt. Fund managers will be entitled to make claims for overpaid VAT, which should be passed on to the scheme.
Following the decision in Wheels that defined benefit pension funds were not special investment funds for VAT exemption purposes, the CJEU ruled in ATPthat defined contribution schemes could constitute special investment funds where they pool investments from a number of defined contribution occupational pension schemes or personal pension schemes. HMRC's announcement reflects this decision.
The characteristics required for exemption are that:
- pension funds have been solely funded by persons to whom the retirement benefit is to be paid, i.e., pension customers;
- the pension customers bear the investment risk;
- risk borne by the pension customers is spread over range of securities; and
- the fund contains pooled contributions of several pension customers.