HMRC has published a further Brief on the deduction of VAT incurred on defined benefit pension scheme investment management and administration costs by sponsoring employers.
Background
In the PPG Holdings case, the Court of Justice of the European Union ruled that an employer which had set up a separate pension fund for its employees could, generally speaking, recover the VAT which it had paid on services relating to the management and operation of that fund. This had implications for HMRC policy, which until then had been to let employers recover VAT incurred in the administration of an occupational pension scheme, but not in relation to investment management costs. Where a single invoice related to both types of service, HMRC allowed the employer to treat 30% of the VAT as relating to the administration of the scheme and 70% of the VAT as relating to the investment management.
Since the PPG Holdings decision, HMRC has published a number of Briefs setting out its evolving views on the implications of the decision on its policy. The latest instalment, Brief 17 (2015), was published on 26 October 2015.
Changes previously announced by HMRC
Prior to this recent Brief, HMRC’s position on the recovery of VAT in respect of a defined benefit scheme’s investment management and administration costs following the PPG Holdings case has evolved to confirming that:
- VAT paid on administration and investment management services will be treated in the same way going forward. An employer will be able to recover VAT only where the employer is a party to the contract and pays for the services (and received a VAT invoice) and there is “contemporaneous evidence that the services are provided to the employer”.
- It may be possible to use a tripartite contract between an employer, trustees and the service provider to satisfy this requirement. The employer should have certain minimum rights and obligations under the contract including an obligation to pay for the services, an ability to seek legal redress in the event of a breach of contract and the power to terminate the contract.
- Until 31 December 2015, transitional arrangements will permit employers and pension scheme trustees to disregard this revised approach and continue to adopt the previous VAT treatment and the 30/70 rule.
Brief 17 (2015) - key messages
The most recent brief from HMRC announces a 12 month extension to the transitional period due to end on 31 December 2015. It also provides an update on HMRC’s position on possible arrangements for employers to achieve VAT deduction going forward.
HMRC recognises that the approach outlined in their previous brief for tripartite contracts may mean that the employer would be unable to deduct these costs from their corporation tax liabilities, as they are neither costs for the purposes of the P&L account nor pension scheme contributions.
In relation to administration services, HMRC suggests that trustees could contract with the employer for the service of running the scheme for the employer, and then the trustees would contract with and pay the administration providers. VAT charged by the trustees to the employer may then be deductible if it related to taxable supplies of the employer (including administration, legal, audit, and actuarial costs). The rules of the pension scheme would have to facilitate such an arrangement. Consideration is also given to the use of VAT grouping as a mechanism for facilitating VAT deduction.
HMRC indicates that it continues to consider a number of issues in this area and confirms that further guidance should be expected before the end of the year.
Our view
It seems clear that HMRC still has some way to go before it settles on a final policy position. It is under pressure from a number of stakeholders to find a solution that is workable for the existing UK defined benefit pension scheme regime. The extension of the transitional arrangements to 31 December 2016 will allow some extra time for HMRC, employers and trustees to consider next steps.