Following European Court decisions in two separate cases last year, and a consequent review of its treatment of VAT on services provided to pension schemes, HMRC has now announced changes to its position. In summary:
- in relation to defined benefit (DB) schemes, HMRC will allow sponsoring employers to reclaim VAT paid on administration and other services, subject to certain criteria and
- in relation to defined contribution (DC) arrangements, HMRC acknowledges that certain fund administration services should be exempt from VAT.
Background – the European Court decisions
ATP Pension Services A/S v Skatteministeriet was a Danish case referred to the European Court of Justice (CJEU). ATP argued that a DC scheme, such as those managed by ATP on behalf of Pension Danmark, constitutes a “Special Investment Fund” (SIF), the management of which is VAT-exempt under EU law. The CJEU agreed that funds which pool investments for a number of DC schemes should be treated as SIFs but left it to national tax authorities to decide precisely which services should be exempt from VAT.
The finding in the ATP case was in contrast to that in the earlier case of Wheels Common Investment Fund Trustees Ltd v Revenue & Customs Commissioners. The Wheels case considered whether services provided to a DB scheme could fall within the exemption awarded to SIFs. However, in that case the CJEU held that DB schemes are not SIFs, because the scheme members do not bear the investment risk.
In the last case – PPG Holdings BV – the CJEU found that the VAT charged on services provided to a DB scheme could be recovered by the sponsoring employer, provided that there was a direct and immediate link between the services and the employer’s economic activities and that the employer had met the costs rather than passing them on to the scheme.
HMRC’s reaction
Under past practice, HMRC has always regarded invoices raised by fund managers as relating to both investment management (70%) and administration services (30%). VAT on the former could not be reclaimed, meaning in practice that employers could recover only 30% of the VAT incurred. In future, employers of DB schemes will be able to recover VAT on both fund management and administration costs.
Employers will need to demonstrate that they are a party to the contract for services and that they pay suppliers directly. Where this has not been the case to date – for example where costs are recharged to the scheme – it is unlikely that an historical claim for VAT recovery can be made. Going forward, if the employer recharges costs to the scheme, he will have to charge VAT on that supply.
Where invoices for combined investment and administration services are raised to scheme trustees, HMRC will permit the continuation of the existing 70/30 rule until the end of 2015.
HMRC now accepts that DC occupational schemes should not incur VAT on fund management charges, as long as:
- they are funded solely by the persons (or by their employer) to whom the retirement benefit will be paid ie the “pension customer”;
- the fund pools the contributions of several pension customers;
- the pension customers bear the investment risk and
- the risk is spread over a wide range of securities.
DC schemes may be able to reclaim any VAT that has been charged in the past, subject to a 4-year limitation period. However, it should be noted that the VAT will probably have been borne by the individual scheme members, in which case the VAT reclaimed should be credited to those members’ funds.
Recommended action – DB schemes
We recommend that the following points be considered for action in relation to DB schemes:
- add the employer as a party to all service contracts;
- add provisions to the contracts to require the employer to pay for all services directly (and not to recharge the scheme);
- add a statement to contracts, confirming the employer’s interest in the service as being related to the provision of employee benefits;
- if necessary, amend the scheme’s Schedule of Contributions to reflect any change in the arrangements for paying scheme expenses;
- talk to the scheme’s fund managers: where pooled funds are used a VAT exemption may apply already. If this is not the case, proceed as for other service contracts.
Recommended action – DC schemes
We recommend that the following points be considered for action in relation to DC schemes:
- establish with fund managers that all services are being charged as VAT-exempt;
- where this has not been the case, consider whether to reclaim VAT paid during the last 4 years and
- where the charges – and VAT – have been met from members’ accounts , consider how to apportion the reclaimed VAT between members.