Following the judgment of the Court of Justice of the European Union (CJEU) in Fiscale Eenheid PPG Holdings BV (PPG), HMRC issued three policy announcements during 2014. The latest of these clarifies its change in policy on the recovery by employers of VAT on the costs of administration and management of pension schemes. HMRC has invited businesses to make retrospective claims where appropriate.
The CJEU held that PPG, an employer which had set up a legally separate pension fund for its employees, was entitled to recover VAT on pension administration and investment management services where these costs were not passed on to the pension fund. This was under the proviso that there was a direct and immediate link with the employer’s own supplies.
Under its ‘old’ policy, HMRC allowed employer businesses to reclaim VAT on the setting-up and general administration costs of an occupational pension scheme. However, costs relating to the management of investments were considered to be expenses of the pension scheme and the employer was denied VAT recovery even if it paid the costs. Where an employer was invoiced a single fee for both administration and investment services, HMRC permitted 30% of the VAT on the costs to be recovered by the employer (the so-called ’70/30 split’).
Following the judgment, HMRC announced in Revenue & Customs Brief (RCB) 6 (2014) that it was removing the ’70/30 split’ subject to a transitional six month period and invited businesses to make retrospective VAT claims. HMRC also expressed the view that VAT was not deductible where supplies were not made to the employer or were limited to investment management services. It also stated that where the pension fund bore the costs, there had to be an output tax charge to the pension fund. As a result of discussions with industry, HMRC then issued RCB 22 (2014) which extended the transitional period for use of the ’70/30 split’ and announced that it was further reviewing the VAT treatment of pension fund costs.
Revenue and Customs Brief 43(2014) issued in November 2014, clarifies their revised policy and sets out the circumstances in which an employer can deduct VAT charged on administration and investment management services provided in relation to occupational pension schemes. HMRC now accepts that an employer is entitled to deduct the VAT charged according to its input VAT recovery percentage, but only if the employer can provide ‘contemporaneous evidence’ that the employer:
is the recipient of the services;
is a party to the contract for those services;
has paid for these services; and
holds a valid VAT invoice.
In addition, where an employer recharges a supply of administration and investment management services to the pension fund, HMRC see this as a taxable supply on which VAT is due. This may or may not be recoverable by the pension fund depending on whether it is VAT registered.
HMRC confirms that it has extended the transitional period, during which a taxpayer can apply HMRC’s previous policy using the ’70/30 split’, until 31 December 2015.
In the meantime HMRC will consider retrospective reclaims of VAT which was previously restricted but only where the claimant can satisfy the ‘contemporaneous evidence’requirements which could prove problematic for most businesses.
This decision is likely to have wide application to UK businesses that have a defined benefit pension scheme. There is still some uncertainty as to how HMRC’s revised policy is to be applied in practice and careful analysis of the contractual position will be necessary, both in the past and for the future. For further details on how this new VAT recovery policy is intended to be applied by employers, how to make a retrospective claim and the implications of the transitional rules, please contact a member of the VAT team.