HM Revenue & Customs (“HMRC”) has published a brief announcing a change to the VAT treatment of fund management services provided to pension schemes by regulated insurance companies. The change is likely to result in a significant increase in fund management costs for DB pension schemes.
Currently, fund management services provided by regulated insurance companies to pension schemes are exempt from VAT. The brief announces that, with effect from 1 January 2018, this exemption will be discontinued, with the result that regulated insurance companies will be required to charge VAT on the pension fund management services that they provide.
Impact for DC schemes
There is a separate VAT exemption for fund management services provided to “special investment funds” (“SIFs”). In 2013, the Court of Justice of the European Union (“CJEU”) held in the ATP case that DC pension schemes are SIFs. As such, fund management services provided to DC pension schemes are exempt from VAT, and this exemption will not be affected by the change of policy announced in the brief.
Impact for DB schemes
In 2013, the CJEU ruled in the Wheels case that DB pension schemes are not SIFs. Fund management services provided to DB pension schemes do not therefore benefit from the VAT exemption for services provided to SIFs. As such, with effect from 1 January 2018, regulated insurance companies providing fund management services to DB pension schemes will be required to charge VAT on those services.
Employers may seek to recover VAT charged on non-exempt fund management services. However, HMRC’s policy regarding employer recovery of VAT charged on pension fund management services has been unclear since a CJEU case in 2013 (the PPG case) (see our September 2016 legal update for more details). Prior to the PPG case, HMRC allowed employers to recover 30% of the VAT charged on pension fund management services. Since the PPG case, HMRC has operated a transitional period whereby this 30/70 split continues to be available, but that period is due to expire on 31 December 2017. Guidance from HMRC is expected on whether the transitional period will be extended and/or whether the 30/70 split will be continued, as well as alternative methods for employers to recover VAT charged on pension fund management services.