Some time ago HMRC promised us an update 'in the summer' as to how employers and Defined Benefit (DB) pension trustees might structure working interactions to allow the sponsoring company to continue deducting VAT on costs incurred by the pension scheme.
Deep into autumn, and with time hurtling rapidly towards their (already several-times-shifted) transitional deadline of 31 December 2015, HMRC conceded that a neat solution is nowhere near presenting itself and so has given itself, and the industry, another 12 months to figure things out. Companies can, for the time being, carry on reclaiming VAT in the same way as before until 31 December 2016.
In the meantime, in their Briefing RCB 17/15, HMRC has helpfully set out their latest thinking in relation to some of the solutions put forward. The spanners being thrown into the works from all directions go some way to explaining why it has taken so long to reach a conclusion (the original CJEU ruling in PPG was over two years ago) but might suggest that another 12 months will not be enough time to put this matter to bed for good.
HMRC focuses on a handful of potential workarounds:
- Tripartite agreements, which HMRC concedes may not be as tax efficient as initially supposed, because although they avoid paying VAT, the employer may not be entitled to a corporation tax deduction in relation to the expenses paid.
- Setting up a trustee company which joins the employer VAT grouping: whilst HMRC does give reassurance that they 'are unable to recover VAT from the scheme assets except to the extent that the relevant VAT is attributable to the operations of the pension scheme', it nevertheless remains to be legally tested whether trustees would be held jointly and severally liable for the all of the group’s VAT. (see also VAT on pensions costs – Part 1).
- HMRC hints that an arrangement could be used where trustees contract and pay third party suppliers (for example actuaries, legal advisers and administrators) themselves as now, but having already contracted with the employer to supply them with the service of running the pension scheme. To the extent that VAT charged by a trustee to the employer 'relates to the taxable supplies of the employer', then it will be deductible by the employer.
Another apparently simple solution was presented by the Association of Pensions Lawyers (APL) who suggested that a short amendment to the scheme’s trust deed and rules would be sufficient to establish the required 'direct and immediate link' between the employer’s business and the operations of the pension scheme. However, we understand that HMRC were not amenable to the APL proposal, and neither party has officially confirmed whether this suggestion is a non-starter – not least HMRC who fail to mention it (other than a passing reference to 'other options') in their latest briefing.
It seems that the question of whether sponsoring employers with DB schemes can deduct VAT on third party costs incurred by pension trustees will rumble on for a while yet – well beyond the third anniversary of the CJEU’s ruling in the PPG case. In the meantime, keep an eye out for Part 4 of this blog…
This blog post is intended as a commentary on recent HMRC announcements in relation to VAT on pension scheme services. It is not intended, and should not be construed as, advice to take action (or refrain from taking action) in relation to taxation matters. Trustees and sponsoring employers should seek specialist tax and legal advice before considering their VAT position in more detail.