Her Majesty’s Revenue and Customs (HMRC) has been busy behind the scenes holding an 'informal consultation' on the issue of employers reclaiming VAT on pension scheme costs, and has now given the industry a glimpse of a partial solution in the form of tripartite contracts for investment management services.
However, HMRC has not yet clarified the position in relation to other pension scheme services provided to trustees and employers. In particular we remain somewhat in the dark regarding the reclaiming of VAT on accounting, actuarial and legal fees and must therefore await the further announcements and briefings that are promised in the 'summer'. HMRC has also said they will provide an update on whether VAT can be reclaimed by a corporate trustee joining the sponsoring employer’s VAT grouping.
The question of whether sponsoring employers can reclaim (deduct) VAT on services provided to a legally and fiscally separate pension scheme was raised in the Court of Justice of the European Union (CJEU) by a Dutch company called Fiscale Eenheid PPG Holdings BV (PPG) in July 2013.
HMRC had been allowing sponsors to deduct VAT on invoices for 'administration services' but not for 'investment management services'. Where invoices covered both types of service, a 70/30 split could be assumed as an administrative simplification. Following the PPG case and after issuing several updates, HMRC published Briefing Note 43 (RCB 43) in November 2014 conceding that there are no grounds to differentiate between administration and investment management services and therefore VAT could in theory be reclaimed on both. However, HMRC insisted the employer must now be a party to the contract, pay for the services directly and be the recipient of those services, if VAT is to be reclaimed. The 70/30 simplification will come to an end in December 2015.
Updated position – RCB 8 (2015)
Revenue and Customs Brief 8 (RCB 8) considers the VAT position in relation to services provided to the pension scheme by fund managers. It does not go into detail about other types of services provided, for example accounting, actuarial and legal services. HMRC now says that VAT on investment manager costs can be deducted by an employer entering into a 'tripartite agreement' with the trustees and fund manager, but lists a number of conditions that the agreement must satisfy before VAT can be reclaimed.
These conditions include that the investment management services are provided to the employer as noted in RCB 43, but HMRC does at least recognise that, legally speaking, it is the trustees who must appoint the investment manager. HMRC has also clarified that, if VAT is to be deducted, the employer must pay for the investment management services directly - ie not through the scheme – and not recharge them to the trustees. The fees can however be reflected in an adjusted Schedules of Contributions, so long as the adjustments do not relate directly to invoice amounts.
Companies and trustees will have to jump through several other hoops before being in a position to reclaim VAT. For example, the tripartite agreement must stipulate that the investment manager can only pursue the trustees for payment where the employer is unlikely to pay themselves; the agreement must also allow both employer and trustees to bring legal action against the provider for breach of contract. Finally, HMRC insists the employer must be allowed to terminate the contract (with trustee consent if necessary) and that fund performance reports must be sent to the employer on request (with trustees being able to withhold reports in certain circumstances).
HMRC has said that existing arrangements for reclaiming VAT (including use of the 70/30 rule) can continue until 31 December 2015.
HMRC will issue an update in the summer which sets out further considerations for deducting VAT on services to companies’ defined benefit (DB) schemes. This update is expected to consider whether VAT can be deducted in respect of invoices for actuarial, accounting and legal services. HMRC will also consider whether it is possible for trustee companies to join the same VAT grouping as the employer in order that the employer can reclaim VAT on invoices to the trustees.
Further information will also follow later this year in relation to defined contribution (DC) schemes (following the ATP case – see RCB 44) and hybrid schemes.
In the meantime, trustees and companies should continue to speak to their specialist tax and legal advisers.