Deduction of VAT on fund management costs
Following two recent European court cases, HMRC had proposed that, in order to continue to allow VAT to be recovered on services provided in respect of employer sponsored occupational pension schemes, it will be necessary to enter into tripartite agreements for at least fund management, i.e. contracts between the provider, the scheme trustees and the sponsoring employer. Furthermore, all of this was supposed to be sorted out by the end of this year – with the consequences of failing to do so being an inability to recover the VAT on the services provided to the scheme.
Many in the pensions industry have expressed concerns about the amount of extra work that this would involve, with virtually all contracts having to be replaced by new "tripartite" contracts.
Fortunately, HMRC has relented on at least the timescale. Its latest Brief on VAT recovery (while restating their previous position) confirms that the current transitional period, during which current arrangements can continue, has been extended to the end of 2016.
Unfortunately, the new Brief continues to propose that tripartite contracts are an effective way to recover VAT. This would involve making the employer a party to the contract for services, alongside the trustees. Certain other conditions have to be met e.g. the employer must be obliged to pay for the service.
HMRC has also confirmed that before the end of the year it will publish a further Brief. This next Brief will consider whether the tripartite contract structure can be modified to allow a corporation tax deduction.
Other structures are discussed briefly:
- the trustees register for VAT and supply the employer with a service of running the scheme based on services they have bought from third parties and
- using a corporate trustee that is part of the employer's VAT group.
There are various considerations with both of these but, even where suitable for a particular scheme, the indication is that VAT recovery could be incomplete.
The next Brief will respond to unspecified other representations that HMRC has received. These might include the idea of adding a scheme rule declaring that it is run for the employer's benefit, as has been suggested by many commentators. Unfortunately it appears that this was not well received by HMRC
At the moment at least, tripartite contracts look likely to remain central to HMRC's thinking. But until it settles its final position, it is difficult for employers or trustees to decide what to do. At least the extended transitional period provides continued and welcome breathing space. The best hope now is that the further Brief promised this year will give HMRC's stance on the outstanding questions.