On 25 November, HMRC issued two Revenue & Customs Briefs.
The first is on VAT on pension fund costs in the light of the decision of the Court of Justice of the European Union (CJEU) in PPG (click here to view the Brief).
The second is on the VAT treatment of pension fund management services in the light of the decision of the CJEU in ATP (click here to view the Brief).
Below we have set out the background and a suggested way forward.
The CJEU decided the Dutch case of PGP on 18 July 2013. The CJEU held that an employer can recover the VAT on the costs of both administration and investment management services which are incurred for the purposes of running a legally and fiscally independent pension fund set up by the employer for the benefit of employees and former employees.
In the past HMRC had allowed the employer to recover the VAT on administration costs whether those services are contractually supplied to the pension fund (which is usually the case) or to the employer. In cases where the service provider supplied both administration and investment management services recorded on a single VAT invoice, HMRC allowed the employer to recover 30% of that VAT as a proxy for the element relating to administration. The remaining element for investment management was regarded as purely pension scheme related and therefore not recoverable by the employer, but in certain cases some of this VAT can be recovered by the pension fund if it is separately VAT registered.
The decision in PPG has caused HMRC to rethink completely how and to what extent employers can recover VAT on pension fund services. HMRC issued two Revenue & Customs Briefs (RCBs) earlier this year (on 3 February and 27 May 2014). These RCBs set out HMRC’s initial thinking which was essentially only to allow the employer to recover VAT on the costs of pension services supplied to it. What HMRC had not appreciated is that this is rare in the UK because pensions law requires the trustees to appoint various service providers, which therefore makes it difficult for the employer to establish that it has incurred the VAT in question by receiving the supply of pension services. Following a period of consultation, the latest RCB goes a little way to address this and has extended the transitional period to 31 December 2015.
Meanwhile on 14 March 2014, the CJEU held in ATP that a defined contribution pension scheme is a special investment fund for VAT purposes. This means that the services of the management of such a fund are exempt from VAT. The CJEU held that management services mirrored those in the UCITS Directive, which broadly include investment management, administration and marketing. HMRC now recognises that management of similar funds should benefit from VAT exemption.
Suggested way forward
The latest RCB says that an employer can recover VAT on pension costs if it can evidence that the services are provided to the employer and, in particular, that the employer is a party to the contract for those services and has paid for them. If the employer passes on that cost to the pension fund then HMRC now insists that VAT should be charged to the pension fund.
For the pensions law reasons set out above, it is not straightforward to achieve the contractual position suggested by HMRC, but Eversheds specialist VAT and Pensions teams have been working together closely with the CBI and HMRC as part of the consultation process to find a workable solution to this problem. Eversheds is therefore best placed to assist you with working with your pension providers the employer and trustees to create a contractual solution that complies with both pensions and VAT law. Nevertheless this solution does not suit every employer and pension scheme. There are other options available which we would be happy to discuss with you.
The second RCB on ATP states that the management of pensions funds with the following characteristics are exempt from VAT:
- They are solely funded (whether directly or indirectly) by persons to whom the retirement benefit is to be paid (i.e. the pension customers)
- The pension customers bear the investment risk
- The fund contains pooled contributions of several pension customers
- The risk borne by the pension customers is spread over a range of securities.
HMRC state that the UK law will be amended to bring it in line with EU law. Retrospective claims may be made. Most defined contribution (DC) pension schemes have, in practice, enjoyed VAT exemption anyway, but it may be worth considering the position if you do pay VAT on the management of similar funds. In addition, HMRC are looking closely at the implications for other types of fund into which DC monies may be invested and where members may exercise their rights as to where the funds should be invested.
Although the transitional period to 31 December 2015 seems a long way off, it can take time to arrange matters with trustees, employers and service providers. It is for this reason that HMRC has given a generous transitional period. Nevertheless, it is worth considering the options at an early stage. If you would like to arrange a call or a meeting to discuss this please do get in touch.