VAT on costs relating to funded occupational pension schemes
HMRC has updated their internal guidance in relation to funded occupational pension schemes.
In the UK, HMRC’s policy has been to distinguish between costs incurred in relation to the:
- Setting up and day to day administration of occupational pension schemes
- Investment management relating to the assets of occupational pension schemes
HMRC allowed employers to deduct VAT incurred in relation to the administration of an occupational pension scheme but considered that investment management costs related solely to the activities of the pension scheme. However, changes were to be introduced on 1 January 2016 following the Dutch case PPG as it was decided that PPG was entitled to deduct the VAT incurred on both management and investment services provided that there was a direct and immediate link between the services and its own taxable supplies.
Following PPG, HMRC planned to change its policy on the recovery of input tax on the basis the employer would be able to deduct input tax if it receives the supply of services. However, due to the complexities of the interaction of VAT and pension and financial service regulations the changes were delayed twice and expected to be introduced on 1 January 2018. The internal guidance now states that HMRC has come to the view that the existing rules for input tax deduction will continue to be available to taxpayers going forward, together with the newer options following PPG.
To continue with the existing rules:
- Businesses can reclaim VAT in relation to the administration of the fund. The business must have a VAT invoice in their name, even if the trustees contract and pay for the services.
- The pension fund, if it is registered for VAT, is entitled to reclaim VAT incurred on investment advice subject to its partial exemption position.
- Where a supplier issues a single invoice for the supply of administration and investment services the cost can be apportioned. HMRC will accept by way of simplification that 30% of the cost relates to administration and the VAT on this amount is reclaimable by the business.
To adopt the PPG position:
- In addition to the administration services, the employer is entitled to deduct VAT on investment services. HMRC will not accept that the VAT incurred in relation to a pension scheme is deductible by an employer unless the services are provided to the employer and the employer is a party to the contract for those services and has paid for them.
- To adhere to regulatory requirements HMRC accept that a tripartite contract between the trustees, the employer and the provider would meet this condition.
- If there is any recharge by the employer to the pension fund or a decrease in contributions by the employer, this is a supply for VAT purposes and VAT will need to be charged.
- It should be noted that it is HMRC’s view that where an employer pays directly for asset management costs under a tripartite contract the employer is not entitled to a Corporation Tax deduction. This is on the basis that the cost will not be recognised in the P&L and it is not a pension fund contribution.
Businesses with defined benefit pension schemes should review the costs they are incurring for the administration and management of the fund to ensure they are maximising their VAT position.
If you have any questions concerning this article, or for further information and guidance, please contact our Director of VAT, Alison Birch, below.
Written 19 December 2017.