VAT and pensions – what is the current position?
There have been a number of developments in this area recently. In this article, we look at what has changed and what those changes mean for the employers and trustees of occupational pension schemes.
Change affecting DB and DC schemes
For a number of years, HMRC considered that the recoverability of VAT on services provided to pension schemes depended on the nature of the service. If it was an “administration” service then VAT was recoverable, and if it was an “investment” service then VAT was not recoverable. Where invoices combined investment and administration services, HMRC allowed 30% of the VAT to be recovered – known as the “70/30 rule”.
These rules were thrown in to doubt following the judgment of the CJEU in PPG (2013). Following this judgment, HMRC published guidance stating that:
- there were no longer grounds to differentiate between administration and investment services, and
- in order for an employer to recover VAT, the services must be supplied to the employer (VAT on services to the trustees could not be recovered by the employer).
HMRC said that this new regime would apply after a transitional period. The transitional period (which was extended) was due to expire on 31 December 2017.
HMRC originally suggested a number of solutions to help schemes with VAT recovery following the end of the transitional period. These included:
- tripartite agreements between the employer, the trustees and the service provider;
- the supply of services from the trustees to the employer; and
- bringing the trustees into the employer’s VAT grouping.
However, none of these solutions was completely satisfactory and there was concern about what would happen at the end of transitional period.
We now seem to have more clarity in this area. In a recently published internal VAT manual, HMRC has confirmed that the existing rules about when an employer can recover VAT incurred on services to its pension scheme – including the 70/30 rule – will continue.
In addition, HMRC has confirmed the new options for recovering VAT mentioned above will also be available. For a variety of reasons, tripartite agreements were considered by many in the industry to be an unworkable solution, and this is still likely to be the case. However, the other options may be more workable.
The clarity on this issue is welcome and it is particularly refreshing that HMRC is giving taxpayers the “best of both worlds” by allowing them to choose between continuing under the existing VAT rules, or adopting one of the new options if it is more suitable.
Changes affecting DC schemes
The change we have just looked at relates to circumstances where VAT is applied and an employer wants to recover it. However, some of the services provided to “Special Investment Funds” (SIFs) are exempt from VAT. In other words, there is no need to think about recovery because no VAT is applied to the services in the first place.
HMRC previously considered that neither DB nor DC pension schemes qualified as SIFs. However, in the European case of ATP (2014), it was held that DC schemes are SIFs and therefore investment management services provided to them were exempt from VAT.
In light of the ATP judgment, HMRC recently accepted that DC schemes are able to qualify as SIFs, with the result that investment management services are (and always have been) exempt from VAT. However, HMRC has also confirmed that pension schemes that don’t have these particular characteristics do not fall within the scope of the exemption. As such, VAT should be applied on all services provided to DB schemes, and administration services provided to DC schemes.
The last piece of the puzzle here is that the legality of treating DB and DC schemes differently is currently being considered in United Biscuits and Wheels, with judgment being expected in these cases shortly.
Osborne Clarke comment
These developments help to clarify what has become a difficult area. The employers and trustees of occupational pension schemes may like to consider this table, which summarises the current position and suggests actions that they can now take.
|Type of scheme||Investment costs||Administration costs||Actions|
|DC||Exempt (no VAT should have been charged)||Not exempt||Future VAT
Cease paying VAT on investment management services.
Ask investment managers to reclaim overpaid VAT.
Consider a direct claim against HMRC for amounts not recovered by the investment manager.
In respect of administration services that are not exempt, DC schemes can consider the options below available to DB schemes.
(Can choose either of these two options)
(subject to decision in United Biscuits and Wheels)
|Recoverable||No action required if employers and trustees were following previous HMRC rules. 70/30 split on mixed investment/administration invoices shall continue to apply|
|Only recoverable by the employer if services are provided to it.||Consider changing the contractual arrangement or making the trustee part of the employer’s VAT group.|