VAT and pension schemes: HMRC kicks the can down the road
On 5 September 2016, HMRC announced that it was giving itself another year to address some of the difficult issues around VAT on fees charged to pension funds. This means that the end of the current transitional period for retaining the old arrangements is extended from 31 December 2016 to the same date in 2017.
The current position is as follows:
1. In a European Court case often known as ATP, the court ruled that management of pooled defined contribution schemes is an exempt supply for VAT purposes. However, another case known as the Wheels case ruled that not all management supplies benefit from this exemption, in particular those relating to defined benefit schemes.
2. More recently in a third case known as PPG the court decided that an employer can recover VAT on supplies to it whether relating to the administrative or investment management aspects of the pension scheme.
3. HMRC published Brief 43 (2014) in which they accepted that PPG required a change of policy. The original policy is that only VAT on supplies relating to the administrative aspects of the pension scheme is recoverable by the employer. In the light of PPG, VAT on supplies relating to both administrative and investment management aspects of the schemes is recoverable by the employer provided the supply is clearly made to the employer. The previous policy was that an invoice covering both types of supply could have its VAT apportioned as to 30% recoverable by the employer on the basis of relating to administration and 70% being input VAT of the scheme relating to investment activities. Taxpayers could continue to adopt this approach on a transitional basis until 31 December 2015.
4. HMRC then published Brief 8 (2015) in which they indicated that a tri-partite contract between the scheme trustees, employer and service provider would satisfy the requirement for input VAT deduction that the supplies are made to the employer provided several other factors support this, such as the employer paying for the services and having rights such as termination rights.
But some of the advising professions had concerns about changing trustee-adviser relationships to involve the employer and HMRC then alerted taxpayers to the fact that a tri-partite contract would not give the employer a corporation tax deduction for the payments. It explored two alternatives:
a) Pension scheme trustees contracting to receive the supplies and then supplying them on to the employer; and
b) VAT grouping
neither of which are perfect, in particular creating recovery problems for VAT relating to the scheme's investment activities.
HMRC also stated that further alternatives were being considered and that further guidance would be issued in due course. It extended the transitional period ending in 2015 for another 12 months. This has now been extended again while HMRC and the industry continue to grapple with the technical detail that any solution must meet.
It is good to know that HMRC remains open to identifying solutions that work while recognising that pushing through an imperfect solution will not be helpful. Nevertheless it would be nice to think that these issues can be resolved in the extra year. Note that there is no suggestion that the exit of the UK from the EU would affect HMRC's plans even though it is not clear that the European Court decisions would have any continuing legal effect once Brexit takes place.