VAT - further 12 month extension to pensions changes

United Kingdom

HM Revenue and Customs has announced a further 12 month extension to transitional arrangements relating to the VAT treatment of pension scheme costs.  Schemes and employers now have until the end of December 2017 to comply with HMRC’s new requirements. 

Employers have historically been able to recover VAT charged on all fees for services provided to trustees of the employer’s pension scheme, other than the majority of fees for investment management services. However, HMRC’s approach to recovery of VAT has had to change following the decision of the European Court in the PPG case.

To date, the employer has been able to reclaim VAT for services provided to the trustees simply by receiving an invoice addressed to it, even if the fees themselves were paid by or recharged to the scheme. This applied to all services other than investment management fees; VAT on the fees attributable to management of investments could not be recovered by the employer. 

The PPG decision has led HMRC to review the entire arrangement for recovery of VAT on pension scheme costs. It has decided that employers must actually receive the benefit of any services, and pay for those services, in order to recover the VAT.  Under this new regime, simply invoicing the employer for services received by the trustees will not be sufficient.  As a result, employers face losing the ability to recover VAT on any services to the pension scheme unless they find a new way to structure paying for such services.   A variety of alternative solutions have been discussed with HMRC but no one size fits all solution has emerged.

HMRC says that it is struggling to reconcile the PPG decision with pension and financial service regulations, accounting rules, corporation tax requirements and emerging case law.  As a result, it has announced that it is extending the current transitional regime to 31 December 2017.  Until that date, schemes and employers can carry on with current VAT recovery arrangements (although some changes relating to DC costs are already in force).  However, during this transitional period HMRC says employers are free to move to the new regime (or, if relevant, unwind moves already made in that direction) should they wish to do so.

The picture is further complicated by the potential implications of Brexit.  Perhaps because of that uncertainty, HMRC’s announcement hints that a further extension is possible if matters have not been resolved towards the end of next year.