HMRC has released new guidance dealing with the ability of sponsoring employers to recover input VAT in respect of supplier costs for running defined benefit occupational pension schemes. These costs will typically involve a wide range of service providers, including actuaries, investment managers, legal advisers, administrators and auditors.
The previous basis adopted by HMRC in relation to the recovery of such VAT can still be used until 31st December 2015 however the new interpretation can be applied immediately. As the new interpretation is likely to allow more VAT to be recovered than previously, sponsoring employers and pension schemes may therefore want to consider this now.
Sponsoring employers who currently rely on HMRC’s prior interpretation may also need to take action before 31st December 2015 if they are to continue to recover VAT.
Background Prior to a number of recent ECJ cases, HMRC’s position was to distinguish between (i) the setting up and day-to-day administration of occupational pension schemes and (ii) investment management relating to assets of occupational pension schemes.
HMRC practice was to allow employers to treat VAT incurred in the day-to-day administration of a pension scheme as the employer’s input VAT (even where the day-to-day administration is actually undertaken, or paid for, by the trustees of the pension scheme). The sponsoring employer would usually be entitled to recover input VAT incurred on such day-to-day administration costs (on the basis that these were overheads costs of the employer with a direct and immediate link to the employer’s business activities).
In relation to investment management costs, HMRC would treat these as costs of the pension scheme (which were unlikely to be recoverable).
HMRC’s guidance also considered invoices covering both the administration of the pension scheme and the management of the investments. In these circumstances HMRC’s view was that the default assumption in relation to such invoices should be that 30% of the VAT would be treated as incurred by the employer (in relation to the administration of the scheme) and 70% of the VAT would be treated as incurred by the pension scheme (in relation to investment management). HMRC allowed companies to depart from that default position, but there had to be evidence in a particular case that more than 30% should be considered to be “administration” related and therefore recoverable.
In practice, some investment managers have therefore developed a practice of providing split invoices separately covering administration costs and investment costs.
New Interpretation In light of the PPG Holdings case (in which the ECJ published its judgment on 18th July 2013), HMRC issued final guidance in the form of “Revenue and Customs Brief 43/2014: VAT on pension fund management costs” (Brief 43/2014) in late November.
HMRC had previously updated its guidance in Brief 06/2014 and had said that an employer could only recover input VAT in respect of supplies of pension fund administration alone or a combined supply of both pension administration and investment management. HMRC also stated that the supply must be received by the employer rather than by the trustee and that the services must be paid for by the employer and incorporated into the price of the employer’s own goods or services. Following publication of Brief 06/2014, HMRC announced that it would further review this area.
In Brief 43/2014, HMRC confirms that it is changing its policy so that there will now be circumstances where sponsoring employers may be able to claim input tax in relation to both administration and investment management costs. HMRC accepts that there are no grounds to differentiate between those two types of costs. This means that, in both cases, sponsoring employers should therefore now be able to recover input tax.
Under the new guidance, HMRC states that the economic reality is a fundamental criterion and “the most useful starting point is to examine the agreements between the parties”. According to HMRC, payment for the supplies is an “important factor”, but not “decisive”. HMRC requires “contemporaneous evidence that the services are provided to the employer and, in particular, the employer is a party to the contract for those services and has paid for them”. In order for an employer to recover VAT, the supplies will therefore need to be supplied to the employer and the employer will need to hold a valid VAT invoice.
In the context of an occupational pension scheme, a range of services are normally supplied directly to the trustees of the pension scheme. Those trustees will also usually be the body that contracts with the service provider for those services.
In Practice In summary, the key elements here seem to be that, for VAT to be recoverable by a sponsoring employer, that sponsoring employer must:
Pay the invoices of the relevant provider;
Be a party to the provider contract;
Use the services of the provider; and
Receive a VAT invoice in respect of the services.
1. Paying the invoices of the relevant provider
If, as happens a lot in practice, the sponsoring employer already pays pension scheme invoices, this requirement will be met. However, if the pension scheme pays invoices directly or the pension scheme in any way reimburses the sponsoring employer for those invoices, changes may need to be made.
2. Being a party to the provider contract
In many cases, the sponsoring employer will not be a party to the provider contract, but it should be possible to add a sponsoring employer as a party to most supplier contracts. However, given the relationship between the sponsoring employer and pension scheme trustees, thought will need to be given to various issues, not least conflicts, when scripting any amendment to such contracts.
3. Using the services of the provider
This will ultimately be a question of fact, and sponsoring employers will need to ensure that they can evidence that they are using the services of the provider in question. It may be possible, in a number of cases, to point out examples where a sponsoring employer does “use the services” of these types of providers. For example, the pension scheme’s actuary may provide some figures or data direct to the employer, and investment managers may provide some form of reporting to the sponsoring employer. Care will need to be taken that examples like this exist in relation to each supplier for whom the sponsoring employer recovers VAT.
4. Receipt of a VAT invoice
HMRC guidance is clear that the service provider’s invoice would need to be addressed to the sponsoring employer in order to enable the employer to recover the VAT.
Recharging fees to the pension scheme Brief 43/2014 also states that where an employer receives a taxable supply of administration and investment management services, and recharges them to the pension scheme, there is a second taxable supply, between the employer (as supplier) and the pension scheme (as recipient) on which VAT is due. The pension scheme would only be able to recover such VAT to the extent that it is engaged in taxable business activities.
Retrospective Action If sponsoring employers already meet the above criteria and have had services supplied directly to them over time, HMRC have confirmed that those sponsoring employers are entitled (but not obliged) to claim a refund of any input VAT which it has not previously claimed.
Sponsoring employers should therefore consider making a claim for the refund of input VAT which they have previously paid.
The maximum look back period for these types of claim is four years, so this could be relevant for invoices received as long ago as the beginning of 2011.
Transitional Period Sponsoring employers will be allowed to rely on HMRC’s previous practice in relation to the treatment of VAT in this context until 31st December 2015. This means that the 70/30 default split for investment managers’ invoices can still be operated until that date.
However, it could now be possible for sponsoring employer to recover more VAT in relation to their pension scheme costs. As a result, sponsoring employers will want to consider whether they want to take advantage of the new guidance, and whether any change in practice would be required to do so.
As outlined above, there are some practical hurdles to overcome in doing this and these will require sponsoring employers to assess the position on a supplier by supplier basis.