HM Revenue & Customs has published a further brief on employer recovery of VAT charged on services provided to trust-based pension schemes.
Prior to 2014, HMRC allowed employers to recover VAT paid on administration services provided to their pension schemes, but not VAT paid on investment management services. However, HMRC allowed the employer to treat 30% of invoices for investment management services as relating to administration and therefore to recover VAT on that 30% (unless the employer could provide evidence to HMRC that it should be entitled to recover a higher proportion). Whilst in theory the pension scheme may have been entitled to recover VAT on the other 70%, its rate of recovery was usually much lower than the employer’s (and often it did not recover any VAT at all).
In 2013, the Court of Justice of the European Union decided in the PPG case that an employer was entitled to recover the VAT charged on both administration and investment management services provided to its pension scheme if there was a direct and immediate link between the services and the employer’s economic activities as a whole. It was for the national court to decide whether there was a direct and immediate link.
Since then, HMRC has published a number of pieces of guidance setting out its policy on employer recovery of VAT on pension scheme services in light of PPG. Although this guidance proposes a number of possible arrangements which might allow employers to achieve a VAT deduction for the costs of services provided to their pension scheme, each such arrangement raises potential regulatory and/or tax issues for the employer and/or the trustees.1 Further guidance from HMRC was expected this summer.
In the meantime, a transitional period has applied whereby employers can still use the 70/30 split. This period was due to expire on 31 December 2016.
HMRC’s latest brief
The latest brief announces that, as it is taking longer than expected to reconcile PPG with pensions and financial services regulations, accounting rules and emerging case law, the transitional period will be extended for a further 12 months, until 31 December 2017.
The further guidance that was expected this summer has been put on hold while HMRC fully considers the wider implications of the VAT recovery options being proposed. HMRC notes that in the meantime, the VAT recovery methods outlined in its previous guidance can be used, but advises employers and trustees that adopting such methods could have wider implications, in particular in respect of regulatory requirements and employer corporation tax deductions.
HMRC’s decision to extend the transitional period for a further 12 months is extremely welcome given the continuing uncertainty surrounding employer VAT recovery. There is no “one size fits all” solution for improving the employer’s rate of VAT recovery – it will depend on a number of factors, including the circumstances of both scheme and employer. As such, and in light of the delay in publication of HMRC’s further guidance and the extension of the transitional period, we would recommend that schemes and employers: (i) review their arrangements with investment managers and administrators, and review their VAT recovery position generally, and discuss possible ways forward with respect to VAT recovery, but (ii) hold off on making any changes to their VAT recovery arrangements pending publication of the further guidance.