Following several years of uncertainty and a number of announcements, HMRC has confirmed that it will make no change to its existing policy on the recovery of VAT paid for pension scheme administration and investment management services. HMRC’s recently published internal VAT manual confirms its policy in this area and resolves a number of areas of doubt that have existed since a ruling of the Court of Justice of the European Union in the PPG case in 2013, which opened the door to the recovery of VAT on pension scheme investment management services while potentially restricting recoveries of VAT paid for scheme administration services.
HMRC’s confirmed position
In recognition of the issues that employers and pension scheme trustees have had in taking advantage of the new VAT recovery opportunities presented by PPG, HMRC revised its VAT guidance earlier this month to confirm that employers will continue to be able to deduct VAT paid on pension scheme administration costs and that its existing 70/30 split concession will not expire on 31 December 2017 as previously indicated and will instead continue to be available indefinitely.
The 70/30 rule allows employers, where a single invoice has been issued covering pension scheme administration and investment management services, to apportion 30% of the VAT to administration costs, which is then recoverable, with the remaining 70% treated as relating to investment management costs and not recoverable.
HMRC has also confirmed that the continuation of the 70/30 rule will not affect employers’ ability to rely on the types of alternative arrangements that some have been considering to facilitate VAT recovery on fund management costs since the PPG decision such as tripartite contracts (between the employer, trustee and third party service provider), back-to-back service contracts between trustee and employer, and the inclusion of the scheme trustee in the employer’s VAT group.
What this means for pension schemes and employer?
For those who have not yet had the opportunity to restructure their arrangements to maximise VAT recovery in anticipation of the removal of the 70/30 concession at the end of the year, this development will likely be welcomed, preserving the status quo and allowing further time for reviewing existing arrangements and putting in place any alternatives. Employers and trustees will likely want to consider whether they will be better off continuing under the existing HMRC 70/30 rule or exploring one of the alternative arrangements which may facilitate an increased rate of VAT recovery, if the associated legal and regulatory issues can be overcome.
HMRC’s VAT Input Tax Manual, which sets out its policy in this area, can be accessed here.