Act now to satisfy new VAT rules on pension scheme costs

HMRC has clarified some aspects of how employers can satisfy its new rules on reclaiming VAT on occupational pension scheme costs. But employers do need to act now to make sure they are ready for the 1 January 2016 deadline.

As previously reported, HMRC’s new policy is that employers can reclaim all VAT relating to their occupational pension funds, including investment management costs as well as administration costs, if certain conditions are satisfied. Employers could be entitled to greater VAT recovery, as the existing rules only allow employers to reclaim VAT on pension administration costs.  Equally, employers could be worse off under the new rules if they cannot be satisfied.

“But it wasn’t clear from HMRC’s published guidance how employers could meet all these conditions, or exactly what they meant,” says Moore Stephens VAT expert Robert Facer. For example, one condition states that the employer has to be party to the contract with the supplier of the services. But this could create a conflict with the pension regulations, which specify certain areas where the trustee has to contract with the supplier.

Welcome clarification...

HMRC has now announced it will accept that the employer, the pension fund trustee and the supplier can enter into a tripartite agreement for the supply of pension fund-related services. This should allow both the pension regulations and the VAT requirements to be satisfied at the same time.

“On the face of it, this is helpful,” Robert says. “It provides clarity as to how employers can satisfy the requirement that they must be party to the contract with the supplier. But HMRC also says that this is subject to the tripartite agreement meeting various conditions – and then lists quite a few.” For example, both the employer and the pension scheme trustees must be entitled to seek legal redress, and the employer has to be entitled to terminate the contract. In other words, the employer must have real legal rights under the contract, rather than just being a party in name only.

...but still some uncertainty

Some areas of uncertainty remain, however. One of HMRC’s conditions is that the service provider must supply the services to the employer. “This condition still causes some concern,” Robert says. “The service provider will be in contact with the trustee in respect of certain matters. So does HMRC mean that the service provider should in all cases report to the employer? It’s not clear.”

HMRC’s new rules will apply from 1 January 2016. “There is still time for businesses to get their pension affairs organised in order to comply,” Robert says. “But, given that HMRC  could potentially be drawing up new tripartite agreements, they need to start taking action now. There is still some uncertainty about how to meet the conditions, so care should be taken when putting new arrangements in place so that employers can support their VAT position.”

Employers should also try to avoid making a costly mistake. Another HMRC condition is that the employer must pay the service provider direct for the services. HMRC has warned that if the employer pays the supplier direct but then recharges that cost to the pension scheme, that recharge will be seen by HMRC as a VATable supply. “Employers need to be aware of that,” Robert says. “They might recover VAT on the supplier’s costs, but if they recharge it on to the pension scheme, they may just create a VAT cost through that recharge – which takes them back to the position of having a potentially irrecoverable VAT cost.”

Our specialist VAT team will be happy to assist you with implementing the new rules, to ensure that VAT recovery is maximised whilst minimising the risk of a challenge by HMRC. Please contact Robert Facer for further information.