HMRC has now issued further guidance on the implications of the CJEU rulings in ATP and PPG, two cases that dealt with the VAT treatment of costs incurred by pension funds. Clarification of HMRC’s approach has been eagerly awaited, following consultation with a range of industry bodies. So where do things stand now?
Defined contribution schemes
Business Brief 44 (2014) confirms that administration (including fund management) services provided to DC pension schemes are generally exempt from VAT. Trustees can now ask service providers to refund VAT previously charged on fees. The service provider will need to make a reclaim from HMRC, which will be limited to 4 years, and will need to satisfy HMRC that any refund will be passed on to the pension funds trustees. Of course, if the scheme employer has previously recovered the VAT as input tax, that will also now need to be reversed. VAT law does not require taxpayers to unscramble the historic position – some may prefer to leave this unchanged and focus on the future.
Going forward, service providers will need to stop charging VAT where the exemption applies. They may also find their cost base rises as they will be restricted in the input tax they can reclaim on their overheads. This may trigger price adjustment provisions already introduced in some agreements.
Defined benefit schemes
HMRC previously allowed employers to recover a proportion of the VAT incurred on administration costs, applying a 70:30 rule of thumb that gave 30% recovery on the proportion deemed to be attributable to administration rather than investment management. Investment management fees for DB schemes continue to be VATable and HMRC has now announced a revised approach in Business Brief 43 (2014).
Employers may now be able to recover all of the VAT incurred on DC costs. A number of conditions will need to be met:
- The employer must be a party to the agreement with the service provider, along with the pension fund trustees;
- The employer must show it has received the benefit of the services; and
- The employer must pay for the services.
Existing contracts will need to be reviewed and renegotiated to comply with this new approach. Fortunately HMRC are allowing a transitional period to 31 December 2015 during which the old 70:30 rule can continue to be applied by employers.
So, these two pre-Christmas presents from HMRC comes with some strings attached. The differences between DB and DC schemes may also cause some issues in practice. Employers, pension fund trustees and service providers will need to work together to work through the full implications. It could be a busy year ahead.