VAT savings for UK pension funds

Pension funds are likely to hold investments that give rise to both taxable and exempt supplies, meaning that they are partly exempt and unable to reclaim all of the VAT they incur on their costs. The proportion of VAT that can be reclaimed depends on the mix of taxable and exempt supplies made by the scheme.

Some welcome news is that from 1 January 2021, there has been an extension to a VAT recovery rule – UK pension funds that provide specific exempt supplies (known as specified supplies) to customers located outside of the UK are now able to recover VAT on any costs that relate to these supplies. This should result in VAT savings for UK schemes providing these services to overseas counterparties.

Changes to the Specified Supplies Order (SSO)

Previously, only providers of specified supplies – such as the sale of securities including shares, stocks, bonds and debentures – to counterparties outside the EU have been able to recover the input VAT incurred on any associated costs. However, following an update to SSO as a result of Brexit, VAT recovery was extended to organisations providing these services from the UK to the EU from 1 January 2021.

Implications

Now that the VAT treatment of these specified supplies to both in and out of the EU are the same, Trustees of UK pension funds may wish to reassess the structure of their VAT arrangements in order to benefit from this VAT saving.

The possible VAT implications for UK pension funds as a result of the update to the SSO are:

• Funds that are not currently VAT registered but provide specified supplies to the UK and EU will now be entitled to voluntarily register for VAT in the UK, and recover the proportion of input VAT they incur on any associated costs of making supplies to the EU.
• VAT registered funds in the UK that make specified supplies to the EU, that had previously not recovered any input VAT incurred in the course of making these supplies, may wish to consider whether the ‘standard’ method of apportioning VAT between taxable and exempt supplies gives a ‘fair and reasonable’ rate of VAT recovery. If not, they could look to see whether a Partial Exemption Special Method (PESM) could be agreed with HMRC to maximise their UK VAT recovery.
• As pension funds are likely to hold investments that give rise to both taxable, exempt and specified supplies, they may already hold an agreed PESM with HMRC for calculating how much UK VAT they can reclaim. In such cases, these funds may seek to re-visit their current PESM, and assess whether it now continues to provide a ‘fair and reasonable’ method of VAT apportionment. HMRC may also wish to review any current PESMs in place whereby VAT recovery is likely to increase, and may re-impose a standard method or re-negotiate a new PESM if they do not consider the current method to be ‘fair and reasonable’.

Actions for Trustees

The extension of the SSO is a positive development that should result in increased VAT recovery for pension funds. Care is needed in assessing the financial impact of the rule change and in determining what action should be taken. Trustees should also be aware that a significant increase in VAT recovery is likely to trigger a routine VAT inspection from HMRC. It is therefore important that they are comfortable with their scheme’s current VAT compliance position before any inspections are triggered.

If you have any questions or would like to discuss this further, please contact Robert Marchant or your usual Crowe contact.