US Tax Reform

VAT treatment of pension fund management charges

HMRC policy change levels the playing field between insurers and other providers.

Robert Marchant and Adam Cutler
US Tax Reform
On 5 October 2017, HMRC issued Revenue & Customs Brief 3/17 concerning the VAT treatment of pension fund management costs. Unfortunately, this was not the long-awaited confirmation of its view on the VAT treatment of pension fund management costs generally and of an extension to the transitional period. We are still awaiting guidance on this. You can read more about it in our recent alert 'Time ticks on for pension fund VAT changes'.

The current position and what to expect

Currently, charges by insurers to manage Defined Contribution (DC) or Defined Benefit (DB) pension schemes are exempt. With effect from 1 April 2019 (please note – HMRC has deferred this date from its original plan of 1 January 2018), charges to DB schemes will be subject to VAT. This brings the treatment of charges by insurers in line with that of other suppliers. This may be an attempt by HMRC to end some litigation that is at an early stage concerning the unequal treatment of charges to DB schemes. You can read more about this in our alert from January, 'More litigation about VAT on pension costs'. In practice, HMRC suggest that this policy change will make little difference, as insurers are mostly managing DC schemes. The services to these schemes will remain exempt from VAT.

Further guidance in the near future?

It is only to be hoped that this represents the first of a number of policy announcements from HMRC, and that there will be guidance on the other outstanding areas in the near future.

What should you do?

Sponsoring employers and pensions trustees that work with insurers to manage their pension scheme should discuss with their suppliers what this change in interpretation from HMRC will mean. For defined benefit schemes, a VAT charge by the supplier is likely to lead increased amounts of irrecoverable VAT in the hands of the pension scheme. This then calls into greater focus the need to consider whether steps can be taken to enable the sponsoring employer to recover the VAT rather than the underlying fund itself. To discuss this policy change or other issues surrounding VAT and pension schemes, please contact Robert Marchant or Adam Cutler.

Contact us

Robert Marchant
Robert Marchant
Partner, VAT and Customs Duty services