HMRC has published a finalised policy on VAT for pension schemes. The policy covers an employer’s ability to recover VAT on investment management and administration services associated with a pension scheme and the policy also confirms that DC schemes which meet certain criteria will now be treated as exempt from VAT.
HMRC’s revised policy
The new policy follows the decision by the European Court of Justice in PPG Holdings BV from earlier this year. For an update on this case and HMRC’s initial policy reaction please view our February update here.
Employers have previously only been permitted to recover VAT on the setup and administration costs of running the scheme while the scheme itself could recover the VAT on investment management costs. Where the costs were invoiced together and related to both investment and administration, HMRC would permit the employer to recover 30% while the scheme could recover the remaining 70%.
In broad terms, the new HMRC policy adopts the terms of their February announcement. Employers will now be permitted to recover VAT on services relating to the investment management of a pension scheme’s assets, provided that the employer is deemed to be a recipient of the services. Under the new policy, investment management and administration costs will be treated in the same way. HMRC will not accept claims for investment or administration services unless the employer is a party to the services contract and has paid for them.
Retrospective claims for VAT recovery in relation to investment management costs will be considered subject to the usual four year limitation. It should also be noted that HMRC has requested that certain details and calculations are provided in any claim for recovery.
Defined contributions schemes - VAT Exemption
The policy outlines HMRC’s approach to DC schemes and VAT exemption. This follows another decision by the European Court of Justice in ATP Pension Services A/S. Under the new policy, pension schemes with certain characteristics will be considered Special Investment Funds and will be exempt under EU directives from paying VAT on management services. Those key characteristics are:
- The scheme is solely funded (directly or indirectly) by those that will receive the retirement benefits to be paid (beneficiaries).
- The beneficiaries bear the investment risk.
- The fund contains the pooled contributions of several beneficiaries.
- The risk borne by the beneficiaries is spread over a range of securities.
HMRC therefore accepts that funds which comprise the pooled assets of defined contribution occupational pension schemes may fall within the VAT exemption. Funds which contain the pooled assets of personal pension schemes, having all of the above characteristics, may also be exempt. Where a pension scheme pays members’ contributions into a number of different funds, the exemption will only apply to services which relate to the funds that possess the characteristics outlined above. If the contributions of a number of schemes are paid into a single fund, it will be the fund as a whole which will be considered against the characteristics set out above. HMRC guidance on single/multiple supplies may become relevant in this context.
The scope of the exemption will extend to all management costs which are integral to the operation of a pension fund, whether administrative or investment related. Supervisory services will not be included. Furthermore, HMRC has confirmed that such schemes should always have been exempt and that it will consider returning any wrongly charged VAT from the last four years.
DC schemes and their associated employers will welcome this new exemption and may wish to ask their service providers to refund any VAT previously charged on fees where appropriate. If the scheme employer has previously recovered any VAT as input tax, that may also need to be reversed. Going forward, service providers will no longer be able to charge VAT where the exemption applies. This may impact on their costs as they will be restricted in the amount of input tax they can reclaim on their overheads.
For non-exempt schemes, there is no longer a requirement to distinguish between investment and administration costs and the new policy should simplify the tax process for employers. Scheme employers may wish to review their current arrangements and, if necessary, restructure them to ensure that the employer is recognised as a “recipient” of the service. The period during which employers may continue to use the 70/30 split has been extended to 31 December 2015 to allow for any such restructuring. Claims for recovery could be considered but, ultimately, may not be possible as the employer may not be deemed a “recipient” or may not have paid for the services.