HMRC have once again extended the transitional period relating to the recovery of VAT on investment management costs. The period had already been running for 18 months, after the initial 6 months had been extended by an additional 12, and will now continue until 31 December 2017.
The period was implemented following the Court of Justice of the European Union (“CJEU”) ruling in the “PPG” case where it was held that employers may recover VAT paid on investment management costs1. This made sense as part of the Dutch backdrop to the case, where employers rather than Trustees administer pension schemes, in contrast with the UK position.
Prior to the decision, HMRC policy had been to allow administration costs to be recovered, but not investment management costs. Where a single invoice had been issued covering the two, 30% of the VAT was apportioned to administration costs and was therefore recoverable, whereas the remaining 70% was held to be investment management costs, and the VAT was not recoverable. Following the decision, HMRC issued briefings advising of a policy change allowing VAT recovery for investment services connected to a pension scheme in certain circumstances.
The main requirement that HMRC specified was that contemporaneous evidence must be provided to show that the services are provided to the employer.
In order to meet this requirement, the employer would need to be a party to the contract between the service provider and the trustees. This would require consideration of legislative issues, such as ensuring Trustee’s investment powers are not restricted; certain minimum rights and obligations pertaining to the employer being part of the contract; and potentially amending existing arrangements Trustees have with service providers.
At first glance this seemed to solve the problem and implement the CJEU ruling, but it has been indicated that this could have Corporation Tax implications leaving the employer out of pocket, due to the rules on deductions in this area.
The Trustees could also consider becoming part of the company’s VAT group, which is treated as a single entity for VAT purposes. This would mean that it would not be necessary to show that the employer is the entity receiving the services. Trustees who are not incorporated would need to do so, and Trustees would also need to ensure they avoid any VAT liability stemming from other group members.
Actions going forward
The further extension period granted by HMRC is perhaps an indication that they are having difficulty in implementing an effective solution. The fact that another further extension period is mentioned as a possibility, and also that the planned guidance has been put on hold, invites speculation that HMRC are holding off issuing definitive guidance until the final result of Brexit is apparent. They could evade the responsibility of resolving this issue entirely as the PPG judgement may cease to be binding upon the UK.
Their briefing states that during the period, any employers who have adopted a new contract or structure are entitled to revert to the old 30/70 apportionment method during the transition period without penalty. This may be appealing to companies who have, or fear, losing out due to the corporation tax issue.
In the meantime, employers should consider the big picture before making any contractual or structural changes. The old 30/70 method which shows no signs of drawing to an unexpected close, remains penalty free during the transition period, and provides a degree of certainty. Tax liabilities, VAT group structures and protections, and the costs of agreeing and implementing new service contracts are just some of the considerations that are relevant when identifying the best way forward.