HMRC has provided its long-awaited final guidance in relation to the forthcoming pension fund VAT changes.
A significant development is that the existing rules on VAT recovery are permitted to continue and the withdrawal of the 70:30 concession will not take effect from 31 December 2017 as previously indicated. Alternative options for VAT recovery, which may lead to an increase in the overall amount reclaimed, are also considered.
In previous alerts we have explained that for some time there has been a change expected to the VAT rules in relation to pension schemes. EU court decisions have confirmed that a sponsoring employer is entitled to recover VAT on not only the administration but the management of its pension scheme(s), but subject to the normal rules on VAT recovery. In response, HMRC had indicated that the current 70:30 simplification would be withdrawn, allowing the employer to reclaim VAT in full provided it was the recipient of the services. However, this has caused many practical and tax technical challenges that appear to have led to HMRC allowing the existing rules to continue, potentially indefinitely.
Where are we now?
HMRC has held discussions with industry representatives and advisers, including Crowe, in an attempt to establish changes to the pension fund VAT rules. The updated guidance has been published in HMRC's internal manuals (guidance notes provided to its officers), and it is understood that no further guidance is to be provided. As VAT is a self-assessed tax, sponsoring employers and their pension schemes must now make their own decisions as to how much VAT they can reclaim and whether changes should be made to their arrangements to enhance the amount of VAT reclaimed.
There are a number of considerations, including:
Is there VAT on the services?
The starting point is whether or not there should be VAT charged on the supplier's services. Most, but not all, administrative costs will be subject to VAT. However, for investment management services the position is more complex.
For Defined Contribution schemes, investment management services are likely to be VAT exempt. For Defined Benefit schemes, the position depends on the status of the supplier. HMRC has recently deferred the timing from when insurers providing investment management services will lose the ability to apply the insurance exemption. HMRC is yet to announce the effective date of the change (so that insurers would charge VAT on the investment services) so for now such suppliers should be continuing to apply exemption. These changes do not impact 'standard' investment managers who should continue to charge VAT on their services.
In addition, there is ongoing litigation as to whether all investment management services for Defined Benefit pension schemes should benefit from VAT exemption. So there may be further changes in the future.
Recovery of VAT
In situations where VAT has been charged, consideration has to be given to whether it is VAT for the sponsoring employer or pension scheme to reclaim.
HMRC considers that investment costs must be treated differently to administration costs.
For investment management services, the employer can only reclaim VAT when it contracts directly with the supplier and pays for the services. In practice this is unlikely to be the case as there are legal and regulatory difficulties with the supplier being engaged by the sponsoring employer rather than the pension scheme. HMRC’s guidance includes commentary on tri-partite contracts and VAT grouping which have been discussed as potential solutions but both continue to have tax and regulatory difficulties. In practice, VAT incurred on investment management costs is likely to be an irrecoverable cost. The retention of the 70:30 simplification should at least mitigate some of this provided that the supplier is issuing a single invoice covering both administration and investment charges.
For administration costs, the employer can only reclaim VAT if it receives a VAT invoice from the supplier. If this is not possible then a solution to VAT register the pension trustees to provide pension fund management services to the sponsoring employer should be considered.
Whilst HMRC's final guidance having been published is welcomed, there remain a number of uncertainties for sponsoring employers and their pension schemes. There are often significant amounts involved and the VAT technical principles are complex. The issues vary depending on whether the costs relate to Defined Benefit or Defined Contribution schemes and whether they are investment or administration costs.
We will be holding seminars to help organisations to understand the issues and what these developments mean for them. However, to discuss the specifics of your VAT position, please contact our VAT team