UK: VAT Charged On Invoices Relating To Defined Benefit Occupational Pension Schemes – All Change For HMRC’s Approach

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:

  1. Pay the invoices of the relevant provider;
  2. Be a party to the provider contract;
  3. Use the services of the provider; and
  4. 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.

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
Similar Articles
Relevancy Powered by MondaqAI
Clyde & Co
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Clyde & Co
Related Articles
 
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions