VAT: new HMRC briefing on DB fund management costs

United Kingdom

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

HMRC has been reconsidering its treatment of VAT on expenses in DB schemes since the judgment of the Court of Justice of the European Union in the PPGBrief 43(2014)December 2014 case in July 2013. Last year, in , HMRC required the employer both to contract with the provider and to pay for the services in order for it to be the recipient of the services and thus be able to deduct the VAT. Requiring the employer to be a full party to the contract causes problems for trustees in relation to the investment management and professional adviser appointment requirements set out in the Pensions Act 1995 as well as more general trust law difficulties. I considered these issues in an article in .

Following submissions made on behalf of scheme trustees and others in the pensions industry, HMRC has now issued a further briefing on VAT on pension fund management costs in relation to DB schemes Brief 8(2015).

HMRC has now accepted that, due to the unique nature of DB pension schemes, tripartite contracts (trustee/employer/provider) can be used to demonstrate that the employer is the recipient of the supply in relation to DB fund management services. The employer may be able to deduct VAT where, as a minimum, the contract with the provider evidences:

  • the provider makes its supplies to the employer – even though for regulatory reasons it may have been appointed by the trustee;
  • the employer pays for the services directly;
  • the provider will pursue the employer for payment – and will only seek recovery from the scheme or trustees where the employer is unlikely to be able to pay;
  • both employer and trustees have the right to seek redress in the event of breach;
  • the provider will supply the employer with performance reports (subject to conflicts); and
  • the employer is allowed to terminate the contract (this can be with trustee consent and can be in addition to any right of the trustees to terminate).

The employer must pay for the services in full in order to be able to deduct VAT – the "payment" by the employer cannot be by way of a reduction in contributions. If the trustees are recharged for the net cost then that will be consideration for an onward taxable supply and VAT will be due accordingly (unless the trustees can set it off against their own taxable business activities).

For many schemes, this will not be a straightforward solution to the VAT issue. Entering into a tripartite contract can give rise to some quite major legal issues for trustees and it is very doubtful that it is appropriate for many trustees to enter a contract of this nature.

Many DB schemes hold their assets within an insurance wrapper. If this is the case then a VAT exemption for insurance products may well apply and the issue of tripartite contracts will not be relevant.

There remain questions over the ability of trustees of DB schemes to reclaim VAT on administration fees (including actuarial or legal fees) going forward. Brief 8(2015) relates only to fund management charges. HMRC has confirmed that it will be issuing further guidance this summer on other issues including:

  • the VAT treatment of other types of service (such as legal, actuarial and accounting services);
  • the VAT position in relation to other types of pension scheme (such as defined contribution and hybrid);
  • VAT groups that include a corporate trustee and a sponsoring employer; and
  • trustees that charge employers to run their pension schemes.

Unless the further guidance confirms that the pre-Brief 43(2014) HMRC practice can continue in relation to administration charges then there will be uncertainty about whether employers can continue to reclaim VAT in relation to them. This may in fact be of more significance than the fund management position to many schemes.