HMRC has confirmed, through an update to its VAT Manual, that its current policy for the recovery of VAT by employers in relation to pension fund expenses will continue to apply, and also that employers can still use one of the methods previously proposed by HMRC to assist with VAT recovery. This will be welcome news to employers sponsoring defined benefit pension funds, who were facing uncertainty on whether their current arrangements would need to change from January 2018.
After months of speculation and just weeks before the current transitional period ends on 31 December this year, HMRC has confirmed, through an update to its VAT Manual, that its current policy for the recovery of VAT by employers in relation to pension fund expenses will continue to apply, and also that employers can still use one of the methods previously proposed by HMRC to assist with VAT recovery (see further below). This will be welcome news to employers sponsoring defined benefit pension funds, who were facing uncertainty on whether their current arrangements would need to change from January 2018.
HMRC's policy on the recovery of input VAT on management services provided to defined benefit pension funds has long been that:
input VAT incurred by an employer on the costs of administration services provided for a pension fund (including for the establishment of the fund and its day-to-day management) is recoverable;
input VAT incurred on the costs of “investment” services is not recoverable; and
where administration and investment services are both provided to the fund by a single provider and charged to the employer by way of a single invoice, the employer may recover 30% of the input VAT incurred on these combined services (this practice is often referred to as the “70/30 split”).
Following the decision of the European Court of Justice in the PPG case in 2013, HMRC proposed allowing employers to recover VAT on the costs of both management and investment services, but only if they took one of several proposed steps, such as making themselves a party to a “tripartite contract” between the trustee and the service provider, or joining the trustee company to their group for VAT purposes. For further details of these proposals, please see our previous briefing Recovery of Input VAT on Pension Fund Expenses: HMRC’s latest guidance.
Under the proposals, employers who failed to use one of the proposed options faced not only missing out on the opportunity to recover VAT on the cost of investment services, but also losing their existing ability to recover VAT on the cost of administration services. As HMRC had not had sufficient time to consider the impact of the proposed change in policy, HMRC introduced a transitional period to carry out a review of its proposals. During the transitional period, which was due to end on 31 December this year, the current policy outlined above has continued to apply.
Having conducted its review, HMRC has now confirmed that the transitional period will end as planned on 31 December 2017, and that its current policy will continue to apply thereafter, with minor modifications. This means that:
the distinction between the VAT treatment of administration and investment services will continue to apply;
employers who rely on the 70/30 split will be able to continue to do so; and
employers who now wish also to recover input VAT on the costs of investment services have the choice of making use of one of the methods previously proposed by HMRC, such as a tripartite contract or VAT grouping, in order to do this. However, potential difficulties remain as regards an employer's ability to deduct expenses in commuting profits chargeable to corporation tax.
Many employers will likely be relieved that HMRC has decided to preserve the status quo, allowing them to leave their existing pensions VAT arrangements in place. If you do wish to explore the alternative options now available which may allow additional VAT to be recovered, however, we would be very happy to discuss this with you further.