VAT on pension scheme supplies: HMRC extends current practice for another year

United Kingdom

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

Since we last reported on HMRC's deliberations over the VAT treatment of costs and expenses of defined benefit (DB) pension schemes in April, there has been much behind-the-scenes work to reach a solution. This has included proposed standard wording for pension scheme deeds suggested by the Association of Pension Lawyers (which appears to have been rejected by HMRC) and the adoption by some schemes of tripartite contracts between the trustees, employer and fund manager.

A key issue in relation to DB schemes is the treatment of scheme administration (where the VAT can be deducted in appropriate circumstances) and fund management (where currently it cannot).

HMRC has now issued Brief 17(2015). Crucially, this extends the current transitional arrangements (whereby a notional 30/70 split is applied by HMRC between scheme administration and fund management costs where a single VAT invoice has been issued to the pension fund) to the end of December 2016.

Alternatively, trustees and employers may adopt the new practice, outlined by HMRC in Brief 43(2014) in December 2014. Under this, HMRC will only allow VAT incurred by an employer in relation to a DB pension scheme to be recovered where there is evidence that the services were provided to the employer and, crucially, the employer is a party to the contract for those services (and has in fact paid for them). This would mean a tripartite agreement between the trustees, employer and fund manager. As we have previously commented, agreements in this form could be problematic for trustees, as legislation requires them to appoint fund managers and other professional advisers in writing, on terms agreed by them.

Even where the trustees, employer and fund manager have agreed a tripartite contract, this may not provide a complete solution. HMRC has now confirmed that only costs recognised in the profit and loss account or contributions to a pension scheme attract a deduction for Corporation Tax purposes. Direct payment by an employer of fund management costs do not clearly fall into either of those categories and so are unlikely to attract a Corporation Tax deduction for the employer. HMRC will be publishing further guidance on this later this year.

There are options other than a tripartite contract which trustees and employers may wish to consider. These include the trustees contracting with the employer to provide third party administration – the VAT charged by the trustees to the employer could be deductible to the extent to which it relates to the taxable supplies of the employer. Another option is for a corporate trustee to be in the same VAT group as the employer. This could have implications for the VAT treatment of the group as a whole and detailed advice should be taken before adopting this route.

There remain questions over the ability of trustees of DB schemes to reclaim VAT on other third party fees (including actuarial or legal fees). In Brief 8(2015) HMRC did confirm that it would be issuing further guidance including on the VAT treatment of other types of service (such as legal, actuarial and accounting services).

The position in relation to DC schemes is unchanged, as outlined in our December 2014 briefing.