Pensions insight
VAT and pension scheme costs
Stuart Earle, pension partner at Eversheds LLP , sets out the latest position
T he issue of the interaction between value added tax (VAT) liability and costs of running occupational pension schemes has been running since the decision of the Court of Justice of the European Union in Fiscale Eenheid PPG Holdings BV cs te Hoogezand (C-26/12) (‘the PPG case’) in July 2013. The PPG case caused HM Revenue & Customs (HMRC) to rethink its policy on VAT and pension funds. As a result, HMRC made clear that for an employer to recover any VAT payable on the cost of running an occupational pension scheme, that employer must both contract for and pay for the services. However, pensions law requires that certain services are procured by the trustees of the scheme rather than the sponsoring employer. Accordingly, it is not straightforward for the employer to recover the VAT payable on pension scheme costs. Although the change in approach to VAT recovery by employers in respect of pension scheme costs was due to be implemented by HMRC at the end of 2016 the detail and complexity of the issues have impacted this timeframe. HMRC has therefore decided to extend the transitional period for the VAT treatment of pensions scheme costs to 31 December 2017. This means that pension schemes and sponsoring employers may continue to rely on HMRC’s guidance which was set out in HMRC Notice 700/17 and so use their pre-PPG arrangements for VAT purposes until the end of next year. Alternatively, schemes and sponsoring employers may adopt one of the alternative structures which may lead to an improvement in overall VAT recovery of pension scheme costs. The options are: ● Implementation of a tripartite agreement – HMRC set out that it would allow an employer to recover VAT paid by it as part of a tripartite contract between it,
the pension scheme trustees of a defined benefit pension scheme and a pension fund manager or administrator. ...not straightforward for the employer to recover the VAT payable on pension scheme costs HMRC has also previously announced that although an employer can recover the VAT payable under such a tripartite contract, in its view direct payment of asset management costs by an employer does not clearly fall within the sponsoring employer’s profit and loss account or contributions to a pension scheme and therefore will not attract a deduction for corporation tax purposes. ● Supply of scheme administration services by pension trustees to an employer – In this alternative, which does not require tripartite contracts, a VAT registered pension scheme provides scheme administration services to the employer. This service is subject to VAT which is then recoverable by the employer, subject to the usual rules on input tax deduction. The VAT registered pension scheme is entitled to recover, in full, the VAT that it pays on administration and general scheme related expenses (including legal, audit or actuarial services), which are used by the trustees to make the onward VAT-able supply to the employer. However, HMRC has pointed out that VAT payable on asset management services will not be recoverable in full. ● VAT grouping – This option may be suitable if there is a corporate trustee of a pension scheme that is eligible to be VAT
grouped with the sponsoring employer. Any supplies made by the corporate trustee, including dealing in the assets of the fund, are deemed to be made by the VAT group representative member. HMRC has said that the cost of administration and other general scheme related services that do not have a direct and immediate link to the management of a pension scheme’s assets, and therefore the scheme’s investment activity, will be overhead costs of the VAT group and will be deductible in accordance with the usual VAT deduction rules. Any VAT payable on asset management services that has a direct and immediate link to the trustee’s VAT exempt investment activity and potentially to the VAT group’s overhead costs will only be partly recoverable according to partial exemption rules. HMRC’s position remains that it is unable to recover VAT from scheme assets under the statutory provisions concerning joint and several liability of VAT group members, except to the extent that the relevant VAT debt is attributable to the administration and operations of the scheme. What next HMRC’s latest brief (http://bit.ly/1N4ebxS) sets out these options in more detail and indicates that further guidance will be published by the end of 2016. HMRC has also confirmed that it is still considering representations which have been made more recently, in particular, in relation to asset management services and whether there are alternative tripartite structures that would enable a corporation tax deduction. Further guidance is due to be published later this year. n
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Issue 25 | November 2016
| Professional in Payroll, Pensions and Reward |
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