Pension schemes and VAT – the latest developments

United Kingdom
HMRC has issued two new Briefs about employers’ ability to recover VAT in relation to pension schemes, both of which follow decisions by the Court of Justice of the European Union.

Defined benefit arrangements

HMRC’s longstanding practice had been to allow employers to deduct VAT incurred in relation to the general management of a defined benefit pension scheme. However, HMRC took the view that investment by trustees was not part of the employer’s business and so employers could not claim input tax on the costs of managing those investments. In the PPG case last year, the CJEU challenged such an approach. It held that a Dutch employer could deduct VAT paid on both administration and fund management services, so long as there was a “direct and immediate link” between those services and the employer’s own supplies.

In its latest Brief, HMRC accepts that in relation to either scheme administration or investment management, the employer will potentially be able to deduct input tax so long as it and not the pension scheme is the recipient of the supply of services. This will be a question of fact in each case. However, HMRC goes on to say that it will not accept that VAT incurred in relation to a pension scheme is deductible by an employer “unless there is contemporaneous evidence that the services are provided to the employer and, in particular, the employer is a party to the contract for those services and has paid for them.

Earlier this year HMRC also announced the end of the “70/30” rule under which, where it was not possible to break down an overall fee into elements paid for general management and investment activities respectively, employers would assume that 70% of activities were investment and 30% were management. However, an initial transitional period - in which use of the 70/30 rule continues to be permitted where the pension scheme receives the services - is now being extended to 31 December 2015.

The Brief can be found here.

Defined contribution arrangements

In another case, ATP, decided in March, the CJEU decided that a Danish defined contribution scheme could be regarded as a “special investment fund” for VAT, making investment management of such funds exempt from VAT altogether. The case opened up the possibility of reclaims in relation to DC schemes with segregated investments managed through asset managers.

In its Brief, HMRC says that pension funds will be “special investment funds” following ATP where:

• they are solely funded by persons to whom the retirement benefit is to be paid;
• those “pension customers” bear the investment risk;
• the fund contains the pooled contributions of several pension customers; and
• the risk borne by the pension customers is spread over a range of securities.

The Brief can be found here.

What should employers do next?

Most employers will already have considered, with trustees and advisers, the extent to which they are able to reclaim VAT paid in relation to their pension schemes. They should review their position in the light of the latest guidance. For defined benefit schemes, this may mean revisiting the structure of key contracts.

Employers with defined contribution schemes will have to analyse the new Brief carefully, but it may have opened the door to VAT exemption and, for some employers, to reclaims for past periods.