Historically, HMRC have allowed a simplification for the VAT incurred on the administration of a pension fund. This simplification allowed employers to treat 30% of the VAT charged by scheme managers as relating to the management of the fund and, therefore, recoverable by the sponsoring employer. However, following the 2013 judgment in Fiscale Eenheid PPG Holdings BV (PPG), HMRC withdrew this simplification subject to a transitional period (which was due to end on 31 December 2017).
Rather than the 70:30 simplification, other specific ‘post-PPG’ arrangements were proposed which would continue to allow the sponsoring employee to recover the VAT on scheme administration services. These options include
- tripartite contracts between service provider, employer and scheme trustee(s);
- ‘on-supply’ arrangements involving the supply of management/administration to the employer by scheme trustees or holding/service companies; and
- the use of VAT grouping.
However, HMRC have now confirmed that the old simplification is no longer withdrawn and it will continue to be available to taxpayers as an alternative to these ‘post-PPG’ options.
Although the simplification will continue to be available, HMRC’s guidance suggests that there will be an increased focus on some aspects of the old policy; in particular, the requirement for the sponsoring employer to have an invoice made out in their name.
In addition to the new guidance issued by HMRC, a business brief (03/2017) was also issued at the start of October dealing with the VAT liability of pension management costs. Employers will need to consider both aspects when considering how they should approach VAT recovery on pension fund costs.
The effect of the new guidelines
1. Is there VAT on the services?
As always, the first consideration is whether VAT should be charged on the pension fund manager’s services in the first place. Most, but not all, administrative costs will be subject to VAT. However, for investment management services the position is more complex and is subject to change with effect from 1 January 2018.
- For DC schemes, as these schemes qualify as SIFs following the ATP Pension Services CJEU decision, HMRC accept that investment management services provided will be VAT exempt;
- For DB schemes, the withdrawal of HMRC’s the policy of allowing insurers to treat their supplies of non-SIF pension fund management services as VAT exempt means that, from 1 January 2018, additional VAT will be incurred on the management of such schemes.
2. Recovery of VAT
In situations where VAT has been charged, consideration has to be given to whether it is VAT for the sponsoring employer or pension scheme to reclaim.
For investment management services, the employer can only reclaim VAT when it contracts directly with the supplier and pays for the services. As there are legal and regulatory issues to overcome where the sponsoring employer, rather than the pension scheme, contracts with the investment manager, this may be difficult to achieve. As outlined above, HMRC’s guidance on ‘post-PPG’ arrangements suggests tri-partite contracts and VAT grouping as potential solutions. However, HMRC have provided no guidance on the accounting and corporate tax implications of these options. In practice, provided that the employer can take advantage of the 70:30 simplification, any irrecoverable VAT should be limited to 70%.
For administration costs, the employer can only reclaim VAT where it receives a VAT invoice from the supplier. If it is not possible for services to be invoiced direct to the employer, consideration should be given to another of the ‘post-PPG’ solutions - VAT register the pension trustees and enter into an ‘on-supply’ arrangement whereby the pension trustees provide fund management services to the sponsoring employer.
Finally, depending upon the type of investment held by the pension fund (for example opted property or non-EU securities); it may be beneficial to register the pension scheme to allow recovery of the VAT incurred by the scheme in relation to these investments.
The release of a ‘final’ position by HMRC is to be welcomed. However, the position has been very confused in recent years which increases the risk of errors being made by taxpayers. The review of pension fund VAT recovery is one of the areas covered in the VAT health check offered by AAB.
If you would like further information about the pension scheme changes or would like to understand more about our VAT health check, please contact Alistair Duncan, Director (firstname.lastname@example.org) or your usual AAB contact.