In our February update, we reported on Revenue & Customs Brief 06/14. This explained that HMRC had withdrawn its existing policy as to the extent to which an employer could deduct input VAT on costs incurred in relation to the management of its defined benefit occupational pension funds.
On 27 May 2014, HMRC published Revenue & Customs Brief 22/14, which provides an update on HMRC’s position and extends the transitional period.
The European Court of Justice (ECJ) decision in PPG2 held that an employer that has set up a legally and financially separate defined benefit pension fund can deduct input tax incurred on administration and fund management services provided there is a direct and immediate link between those services and the employer’s own supplies.
HMRC’s policy (prior to Revenue & Customs Brief 06/14) had been to make a distinction between costs incurred (i) in setting up, and in the day to day administration of the pension fund, and (ii) in management of the fund’s investment activities.
Whilst, under HMRC’s prior policy, the former were VAT-deductible for the employer (as overheads of the employer, with a direct and immediate link to the employer’s business activities) the latter were not (as relating solely to the pension fund itself).
In cases where the employer is provided with a single invoice from a third party pension fund manager for both administration and management services, HMRC’s prior policy was, “by way of simplification”, to allow the employer to claim 30% of the VAT as relating to management services, and to allow the pension fund itself to claim 70% of the VAT as relating to investment management services.
With effect from 3 February 2014, HMRC changed its policy. Provided the employer can demonstrate the requisite direct and immediate link between the pension fund administration and management services and its own taxable supplies – which, in HMRC’s view, means that the services must “go further than the management of the investments” – the employer will no longer be prohibited from claiming input tax in respect of such services. Whether the link is direct and immediate will depend on whether the cost of the input services is incorporated in the price of the supplies made by the employer in the course of its business.
However, input VAT will not be deductible by the employer where:
- the supplies were not made to the employer; and/or
- the supply is limited to investment management services only (ie it is not a combined supply of administrative and management services).
HMRC provided that as a transitional measure, employers and pension funds could continue to adopt the 30/70 split referred to above for a further six months from 3 February 2014.
In the meantime, HMRC says it has had “extensive discussions” with industry representatives on the new policy. In addition, the ECJ has published its decision in ATP Pension Services (C-464/12). This case concerned the VAT treatment of pension scheme administration services provided in relation to a defined contribution occupational pension scheme. The ECJ held that some of the services supplied could qualify for exemption on the basis that the scheme was a “special investment fund”.
HMRC is therefore further reviewing the VAT treatment of pension scheme administration and fund management services, and considering whether the guidance outlined in Brief 06/14 needs to be revised.
Further guidance will be issued in the Autumn to account for both of the above judgments. In the meantime, businesses may (if they wish) continue to use the transitional arrangements noted above.
To read Revenue & Customs Brief 06/14 click here
To read Revenue & Customs Brief 22/14 click here