Those that do not take action in responding to the changes are likely to suffer increased VAT costs.
There has been a long period of uncertainty in relation to VAT and both defined benefit and defined contribution pension schemes.
For the past 10 years, there has been litigation in the courts relating to whether VAT should be charged on pension fund-related services, and where this is the case, how much VAT can be reclaimed by pension funds and their sponsoring employers. Some of this litigation has concluded, some is ongoing.
What we know for sure is that EU court decisions have confirmed a sponsoring employer is entitled to recover VAT on not only the administration, but the management of its pension scheme (subject to the normal rules on VAT recovery).
This has caused many practical challenges, in particular the requirement that the employer receives services from the supplier in order to claim VAT. Over the past couple of years HM Revenue & Customs has been working on revisions to current UK policy, considering what VAT can be reclaimed to try to give effect to these decisions.
This is in addition to the numerous guidance notes that have been issued, highlighting that the VAT recovery rules are due to change with effect from December 31 2017.
However, despite HMRC working with industry representatives and advisers in an attempt to resolve some of the outstanding issues to provide revised guidance, there seems little prospect of all of the challenges being resolved in the short term.
We understand that HMRC's proposed approach will be to issue last year's draft guidance in pretty much the same form as final guidance, noting there are certain areas that remain contentious or unresolved. This guidance was expected to be issued in the spring, but given the recent general election any policy announcements were put on hold.
Most trustees of pension schemes and directors of their sponsoring employers have, understandably, been reluctant to commit to changing their structures while the position remains in flux.
Deciding on, and implementing an appropriate strategy is likely to take many months; given the deadline at the end of this year, organisations would value certainty being provided sooner rather than later in order to implement changes to minimise the VAT costs.
Ultimately, VAT is a self-assessed tax, and organisations may need to work with their advisers to implement arrangements that work for them while HMRC finalises its position.
This article first appeared in Pensions Expert on 26 June 2017.