UK: HMRC Amends Policy To Allow DB Employers To Recover VAT On Certain Investment Activity Costs

Last Updated: 25 February 2014
Article by Michael Cant

Summary and implications

HMRC has published a briefing (Brief 06/14) stating its revised policy on the ability of sponsor employers to recover input VAT incurred in the management of defined benefit (DB) pension schemes. This policy has been updated to implement the recent ruling in PPG Holdings BV.

  • Albeit grudgingly, HMRC now accepts there is greater scope for DB pension scheme employers to reclaim input VAT on the costs of investment management services where they are provided alongside administration services. This may result in a material saving for scheme employers who can offset this against their output VAT.
  • Employers may also be entitled to reclaim significant amounts of overpaid VAT where they have been invoiced for both management and investment costs in the last four years and should consider making any such claims as soon as possible.
  • Since there will no longer be an assumed 70/30 split for combined invoices, scheme employers will have to justify the amount of VAT claimed on mixed invoices. They may find they cannot recover as much as they would have previously.

HMRC's previous policy and the 70/30 split treatment

Previously, HMRC distinguished between costs incurred in relation to the general administration of pension scheme, and costs incurred in the management of the scheme's investment activities. It only permitted employers to recover VAT incurred on the former.

Where a single invoice was issued which covered both general management and investment services, HMRC accepted that the employer was entitled to attribute 30 per cent of the VAT to general management. The pension fund was entitled to reclaim the remaining 70 per cent but only if it made taxable supplies. That was unlikely.

VAT recovery: management and investment costs of a pension fund
Our previous briefing on the case of PPG Holdings BV. More

CJEU's decision in PPG Holdings BV

In July 2013 the European Court (CJEU) held in the case of PPG Holdings BV (PPG) that an employer is entitled to recover VAT on the cost of both general management and investment services so long as there is a "direct and immediate link" between that expenditure and the taxable activities of the employer. In other words, the cost of the services received must be incorporated into the price of the supplies made by the employer.

HMRC's new policy

Responding to this judgment, HMRC has now withdrawn the 70/30 split treatment and confirmed that "there are circumstances where employers may be able to claim input tax in relation to pension funds where they could not previously". However HMRC has not yet offered any examples of what circumstances these might be.

There are circumstances where employers may be able to claim input tax in relation to pension funds where they could not previously.

In its briefing, HMRC highlights the principle that an employer can only deduct VAT incurred on costs relating to a pension fund where there is a direct and immediate link between the supply received and the supplies it makes.

In the view of HMRC, VAT incurred in relation to pension fund management or administration will not be deductible where:

  • the supplies have not been made to the employer; or
  • the supply is limited to investment management services only and is not a combined supply of both investment management and pension administration services.

In addition, if an employer receives the services but passes the costs to the pension fund then an equivalent amount of output VAT in respect of those amounts must be accounted for on the supply from the employer to the pension fund.

HMRC has made it clear that in its view specific investment costs cannot be general costs of the employer as they have a direct and immediate link to the supplies of the specific investments themselves. HMRC argues that these costs are therefore not VAT deductible for the employer.

However, HMRC has acknowledged that where investment-related services "go further than the management of investments" they may be general costs of the employer and may be incorporated into the price of the taxable supplies it makes. If so, VAT incurred on them may be recoverable.

Retrospective and future action

HMRC's new policy is effective from 3 February 2014, although there is a six-month transitional period during which pension funds and employers may still agree to a 70/30 split where the pension fund is invoiced for services.

AG opinion: management services for DC pension schemes are VAT exempt
Briefing on the Advocate General's opinion on the ATP PensionService case. More

HMRC has confirmed it will accept retrospective claims for overpaid VAT where both general management and investment management costs were invoiced to the employer. Such claims are subject to the normal four-year limitation period. Where a 70/30 split has been used in the past, care will be needed with regard to any VAT already claimed by the pension scheme as well as that claimed by the employer.

In its briefing HMRC notes that the CJEU's decision is still pending in regard to the ATP PensionService case which has raised questions regarding the issue of VAT paid on investment management services under defined contribution (DC) schemes. HMRC warns that if the court holds that VAT should not have been charged on such services then it will take "appropriate steps" in the future to recover any VAT deducted that was incorrectly charged.

Comment

HMRC has confirmed that it will update its VAT Notice 700/17 shortly to reflect these changes and this may provide further explanation as to what effect this policy change will have in practice. It may also provide some useful examples to illustrate circumstances which will or will not result in investment costs being VAT deductible.

In the meantime, employers should consider whether they are entitled to reclaim any VAT paid in relation to their pension schemes following this policy change and, if so, should get their claims in as soon as possible.

Since the ability of employers to reclaim VAT on investment management services now clearly depends on whether the services are supplied directly to the employers and whether they are provided separately or alongside other management services, employers may also need to give some thought to how the investment management services for their pension schemes are organised.

This briefing is unlikely to be the last word on the recovery of input tax on pension schemes. HMRC has arguably taken a very narrow interpretation of PPG and a number of employers are already restructuring their arrangements to achieve total recovery. Whether they or HMRC are correct will doubtless be decided in the courts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.