HMRC extends pension scheme VAT arrangements for a further year

Posted by John Hamilton on
HMRC announced on 5 September 2016 that employers and trustees will have a further 12 months to bring their defined benefit pension scheme VAT recovery arrangements into line with HMRC's new policy.

HMRC extends pension scheme VAT arrangements for a further year

HMRC announced on 5 September 2016 that employers and trustees will have a further 12 months to bring their defined benefit pension scheme VAT recovery arrangements into line with HMRC's new policy. This is the third time that HMRC has extended the transitional period and a further extension cannot be ruled out if employers and trustees are not ready to make the changes by the new end date of 31 December 2017.

For defined benefit schemes, the current issue arises from the decision of the Court of Justice of the European Union (CJEU) in its landmark decision in  PPG Holdings BV C-26/12 case (“PPG”) in July 2013. For defined benefit schemes, the traditional view of HMRC was that VAT on management/administration costs was recoverable by an employer, but VAT on investment costs was not. However, this is no longer a valid distinction following the PPG case.

During the transitional period, employers can continue to recover the VAT incurred in the administration of the scheme (subject to the normal VAT recovery rules applying), but cannot recover VAT incurred from fund investment services. If a fund manager provides both administration and investment services to a scheme, provided these services are included in the same invoice, HMRC will normally allow an employer to recover 30 per cent of VAT incurred on those fees as being related to administration, subject to the normal rules of VAT recovery.

HMRC's new policy no longer distinguishes between administration and investment management costs. In theory, this should mean that VAT can be reclaimed on both.  However, HMRC will require there to be a clear supply of services to the employer (as opposed to the trustees) if VAT is to be recoverable by the employer. It is in relation to this area in particular that many employers and schemes were waiting for further guidance from HMRC before taking action.

It would appear that HMRC has encountered a number of difficult issues in its attempt to reconcile the PPG decision with pension and financial services regulations, accounting rules and corporation tax in the UK. Guidance that HMRC had been intending to publish on possible options for VAT recovery has been put on hold while it fully considers the wider implications of these options. The implications of Brexit are also no doubt being considered by HMRC and have added to some of the difficulties.

HMRC recognises that some employers and pension funds may have already made changes to their structure and/or contractual arrangements to comply with HMRC’s previous guidance in Revenue and Customs Brief 43/2014. Provided that the employer and pension scheme agree to both apply this treatment, HMRC has confirmed that taxpayers may continue with these arrangements. HMRC has also confirmed that, if they wish to do so, employers and pension schemes can revert back to the previous treatment, outlined above, during the transitional period.

We may not now see further guidance from HMRC until the second part of 2017. For the time being, we would recommend that schemes and employers continue to monitor developments, and liaise with their tax and legal advisers to ensure that they adopt a compliant and tax-efficient structure both during the current transitional period and from 1 January 2018.

About the Author

John advises corporate and trustee clients on pensions law and is a director of Blake Morgan's Pension Trustees Limited, the firm’s independent trustee company.

John Hamilton
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