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HM Revenue and Customs Brief 43/14 - VAT on pension fund management costs

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Published 25 November 2014

Purpose of this brief

This brief sets out the position of HM Revenue and Customs (HMRC) following the decision of the Court of Justice of the European Union (CJEU) in Fiscale Eenheid PPG Holdings BV cs te Hoogezand (C-26/12) (PPG). The case concerned an employer’s entitlement to deduct VAT paid on services relating to the administration of defined benefit pension schemes and the management of their assets.

Revenue and Customs Brief 6 (2014) set out HMRC’s initial reaction to the judgment. However, following the subsequent decision in the case of ATP Pension Services (C-464/12) (ATP) and discussions with industry representatives HMRC issued Revenue and Customs Brief 22(2014) announcing that businesses could continue to use the transitional arrangements outlined in Revenue and Customs Brief 6(2014) whilst the VAT treatment of pensions was reconsidered.

This brief outlines the position of HMRC following that process and deals with the circumstances when an employer may deduct VAT that is charged on services provided in relation to pension schemes. A separate brief has been issued to explain the circumstances where VAT is not chargeable on such services following the ATP decision.

You can read the full text of the PPG and ATP decisions on the CURIA website.

1.1 Readership

This brief is aimed at:

  • businesses and other taxable entities that provide pension schemes for their employees
  • pension fund management providers
  • pension scheme trustees and pension providers
  • tax advisers

1.2 Background

PPG, a Dutch company, established defined benefit pension schemes for its employees which were required by law to be legally and financially separate from it.

PPG received supplies of services relating to the administration of the pensions and investment management of the assets of the pension fund from third parties on which VAT was charged. It paid the cost of these services itself and did not pass the costs on to the pension fund.

The CJEU decided that PPG was entitled to deduct the VAT incurred by it in such circumstances, provided that there was a direct and immediate link between the services and its own taxable supplies.

1.3 HMRC previous policy

Until now, HMRC policy has been to distinguish between costs incurred in relation to the:

  • setting up and day to day administration of occupational pension schemes
  • investment management relating to the assets of occupational pension schemes

HMRC previously allowed employers to deduct VAT incurred in relation to the administration of an occupational pension scheme on the basis that these costs were overheads of the employer and thus had a direct and immediate link to the employer’s business activities.

In respect of investment management costs, HMRC considered these costs to relate solely to the activities of the pension scheme. To the extent that these inputs were deductible, they were deductible by the scheme.

In some cases a single invoice was received covering both the administration of the pension scheme and the management of the investments. In such circumstances HMRC allowed the employer to claim 30% of the VAT as relating to the administration of the scheme and the pension scheme to claim 70% as relating to the investment management as an administrative simplification.

1.4 Deduction by the employer

As a result of the PPG judgment, HMRC is changing its policy on the recovery of input tax in relation to the management of pension schemes. This means that there are circumstances where employers may be able to claim input tax in relation to pension schemes where they could not do so previously.

VAT which is incurred on goods and services supplied to a taxable person is deductible if it is used for the onward taxable supplies of that person. The first stage in deciding whether the VAT on services may be deductible by an employer is to determine whether the services in question are supplied to the employer.

In the case of occupational pension schemes, there are normally 2 potential recipients of the supplies: the employer and the pension scheme through its trustees. The Courts have made clear that determining which of 2 persons is the recipient of a supply of services is a highly fact sensitive question that will depend upon consideration of all the circumstances in which the transaction in question took place. A fundamental criterion to be considered is economic reality and the most useful starting point is to examine the agreements between the parties. In this context, whilst the fact that a party pays for the supplies is not decisive, and payment may be third party consideration for supplies made to another party who is the actual recipient of the supplies, payment is an important indicator, particularly in cases where 2 parties use the services.

Accordingly, HMRC will not accept that the VAT incurred in relation to a pension scheme is deductible by an employer unless there is 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.

HMRC accepts that there are no grounds to differentiate between the administration of a pension scheme and the management of its assets, therefore there is no longer a need for any administrative simplification to deal with supplies involving both elements. In each case the employer will potentially be able to deduct input tax if it receives the supply of services.

In order to deduct, a business will require a valid VAT invoice. Where an employer is engaged in non-business activities or makes exempt supplies, it will need to take these into account when deducting any VAT incurred and restrict its deduction accordingly. Further information on the treatment of non-business activities can be found at chapter 4.6 of Notice 700, The VAT Guide and on partial exemption in Notice 706, Partial exemption.

If an employer receives a taxable supply of administration and investment management services and recharges them to the pension scheme, that recharge is consideration for an onward taxable supply. VAT is due accordingly. This amount is potentially deductible by the pension scheme to the extent that it is engaged in taxable business activities.

VAT Notice 700/17 Funded Pension Schemes will be updated shortly to reflect these changes in VAT treatment.

1.5 Claims and retrospective action

RCB 6(2014) withdrew with immediate effect the policy currently outlined in Notice 700/17 and set out at 1.3 above except in circumstances where the pension scheme receives the services. In these circumstances, RCB 6(2014) and RCB 22(2014) provided a transitional period to allow time for businesses to adapt in response to HMRC’s change in policy. This Brief extends that transitional period. During the transitional period, which will last until 31 December 2015, where the pension scheme receives the services the pension scheme and the employer may continue to agree to a 70/30 split on the terms set out in Notice 700/17. HMRC does not intend to take any action to correct the position in cases where the employer has properly deducted a proportion of the VAT under the existing treatment (outlined at 1.3 above) and the criteria outlined at 1.4 above were not met.

Businesses that provide pension schemes for their employees and receive supplies of services that fall within the criteria outlined at 1.4 above are entitled, but not obliged, to claim a refund of any input VAT which has not previously been claimed. Where a business has chosen to apply the 70/30 split, a claim for a refund would entail a recalculation of the amounts of input tax proper to the employer and the scheme respectively.

VAT Notice VAT 700/45 How to correct VAT errors and make adjustments or claims explains how to go about claiming a refund in this circumstance.

Claims for under-declared input tax are subject to the normal capping rules. Claims for repayment will therefore not be considered for periods ending more than 4 years before the date on which the claim is made.

Any claim made must set out the basis of the error and the amount being claimed and show how that amount has been calculated. The claim should also make it clear whether the claim is for VAT incurred in relation to a defined benefit or a defined contribution (also known as money purchase) pension scheme and, if it is incurred in relation to a defined contribution pension scheme whether it is personal or occupational. The claimant must be able to provide copies of the documentation used in the calculation of the claim on request. An ‘estimated’ claim, or a declared intention to lodge a claim at a future date, will not stop the clock running on the 4 year cap.

All claims resulting from the changes outlined in this Brief should be sent to:

Email: vat.ppg.claims@hmrc.gsi.gov.uk

or by post to:

HMRC
VAT Repayments Team S0483
PO Box 200
BOOTLE
L69 9AH

HMRC will now consider those claims for input tax made by businesses following the judgment in PPG. However, they may wish to provide details of their claim to the email address above to ensure that claims are dealt with promptly. In considering such claims account will be taken of claims by service providers that some supplies of administration/investment management were incorrectly taxed, as per the ATP Brief referred to above.


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© Crown Copyright 2014.

A licence is needed to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs.



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Article Published/Sorted/Amended on Scopulus 2014-12-16 09:26:43 in Tax Articles

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