HMRC has announced a change of policy on employers’ ability to reclaim VAT on the investment management costs of occupational pension schemes.
A potential policy change has been awaited since the July 2013 ruling from the Court of Justice of the European Union (CJEU) in the case of PPG Holdings BV (case C-26/12).
Two questions were referred to the CJEU. The first was whether the management of a defined benefit (DB) scheme is exempt from VAT. Unsurprisingly, the CJEU followed the judgment in the Wheels case, confirming that they were not exempt.
More surprisingly in respect of the second question, the court ruled that employers could, in certain circumstances, deduct VAT incurred on the investment management of separate DB schemes established for the benefit of their employees. It is this aspect of the PPG case that has triggered HMRC’s change of policy, as announced in Revenue & Customs Brief 06/14.
Life before PPG
“Previously, HMRC allowed employers to deduct VAT on the initial setting up and day-to-day administration costs associated with pension schemes,” explains Shane Risdell, a senior manager in the Moore Stephens VAT team. “Investment management costs, however, were considered to be costs of the pension fund itself. It was up to the pension fund to reclaim any VAT on such investment management costs, if entitled to do so.”
In practice, however, fund managers would often issue a single invoice covering both administration and investment management services. When issued to the employer, HMRC allowed the VAT incurred to be split 30:70 i.e. 30% of the VAT could be reclaimed by the employer as this element was deemed to be in respect of the administration of the scheme, and 70% was deemed to relate to the investment management services and could be reclaimed by the pension fund (dependent on the VAT status of the fund).
“Under HMRC’s new policy, VAT incurred on the investment management costs of occupational pension schemes can also now be reclaimed by employers, if certain conditions are met,” Shane says.
The main conditions are that employers must be charged for both investment management and administration costs, not simply investment management costs alone. Furthermore, supplies of investment management services must be made to the employer, rather than to the pension fund. This could be an issue for employers, as currently many pension funds directly engage the services of a fund manager.
HMRC’s revised policy takes effect from 3 February 2014. However, for a transitional period of six months businesses may continue to apply the 30:70 split should they wish to do so.
The change of policy relates to VAT on the management of DB and defined contribution (DC) schemes. However, the CJEU’s judgment in the ATP case published on 13 March 2014 may result in the management of DC schemes becoming VAT exempt.
Time to claim
“All employers, regardless of sector, that meet HMRC’s necessary conditions can now submit a VAT reclaim for the last four years, although it will be necessary to take into consideration any VAT already reclaimed under a 30:70 split,” Shane says. “Substantial sums could be at stake, so taking action now is highly recommended.”
For advice on this matter, or assistance with submitting a claim, please contact
a member of the VAT team.