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HMRC's approach to when employers can reclaim VAT paid on services relating to the administration and management of a defined benefit pension schemes changed to the employer's advantage on 3 February 2014. This was in response to the ECJ decision in the PPG case in July 2013.
The new policy gives employers more scope to reclaim VAT on investment management fees, provided there is a "direct and immediate link" between the supply received and the taxable supplies the business makes. There can be a material saving for employers who can set this against their output VAT.
Whether you can make a claim depends on how your investment management services are set up, and whether investment costs are separate or bundled with other services. Changes to invoicing arrangements, and perhaps to the underlying contracts, may be needed to ensure the requirement that the supply is made to the employer is met.
We recommend all employers of DB pension schemes look at how their investment management services are supplied and paid for to assess the scope for minimising VAT. We can assist with assessing the potential for repayment claims, which will be considered by HMRC for periods up to four years before the date on which the claim is made.
HMRC's previous VAT policy (see note 700/17) no longer applies. This stated that the set-up and on-going day-to-day administration costs of a pension scheme set up under trust were attributable to the employing company's business (and so gave rise to a right of deduction), but that the costs of the investment management of the assets of such a pension scheme related solely to the activities of the pension scheme and therefore did not give rise to a right of deduction for the employing company.
Where an invoice related to both investment and administration costs, HMRC allowed 30% of the VAT to be recovered by the employer. This 70-30 split has been abandoned.
HMRC updated its policy in response to the decision in the Dutch case of PPG Holdings BV (C-26/12). This decision focused on whether an employer could deduct the VAT incurred by it on administration and fund management services supplied in relation to the operation of a separate pension scheme. It found that PPG, as the sponsoring employer, was entitled to recover all VAT incurred in relation to the scheme, provided there was a direct and immediate link between the services supplied and the employer's economic activities as a whole.
HMRC's Business Brief 06/14 confirms that VAT may be deducted where there are specific costs of investment management that have a direct and immediate link between the supply received and the taxable supplies that the employer makes. There may be a link where costs form part of "general costs", ie the employer's broad costs base.
HMRC does not accept that VAT is deductible where supply is limited to investment management services only (that is, it is not a combined supply of both investment management and pension administration services). It takes the view that such a supply is linked to the pension scheme's activities, and so is not part of the employer's general costs. As such, and perhaps not surprisingly, the scope of the guidance is limited.
HMRC gives the unhelpful example of the costs of managing a property within a pension scheme. Where the services do not go further than the management of the investments, they will have a direct and immediate link to the rental income derived from the property. HMRC considers these services are therefore directly linked to the activities of the pension scheme and cannot be classified as being part of the general costs of the employer.
However, where the services received go further than the management of the investments, they may be classed as general costs of the employer. In that case, provided the supply is received by the employer, the VAT incurred will potentially be deductible by the employer.
We think this distinction does not strictly reflect the principles in the PPG case. HMRC's approach seems to result in the somewhat arbitrary position that the VAT treatment may be different because of the way that a particular employer and pension scheme have chosen to obtain certain services, rather than because of a difference in the underlying nature of those services and their value to the employer. Subsequent legal challenges may therefore arise.
The March 2013 case of Wheels Common Investment Fund Trustees and Others C-424/11 relating to an occupational DB scheme decided that pension schemes are not "special investment funds". So there is no exemption from VAT applied to their investment management services.
However, the Advocate General decided in December 2013 in ATP Pension Service A/S v Skatteministeriet (C-464/12) that an occupational DC scheme can constitute a "special investment fund", if certain conditions are met. So there can be an exemption from VAT. It remains to be seen whether the ECJ will follow the Attorney General's opinion in this case.
If so, this decision may reduce costs for employers operating DC schemes (or DC elements in hybrid schemes) and for their members. It also leaves the door open for further challenge of the VAT position of DB pension schemes.
For more information please contact Jane Wolstenholme, Partner
T: +44 (0)20 7203 5110