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HM Revenue and Customs Brief 17/15 - deduction of VAT on pension fund management costs


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Published 26 October 2015

Purpose of this Brief

This brief follows on from Revenue and Customs Brief 43 (2014) and Revenue and Customs Brief 08 (2015). These briefs set out our position 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). This 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.

This brief announces a 12 month extension to the transitional period, which was due to end on 31 December 2015. It also provides an update on our position on possible arrangements for employers to achieve VAT deduction for the costs of administering occupational pension schemes and managing their assets going forward.

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


Details of the PPG case can be found in Revenue and Customs Brief 43 (2014). That brief also outlines the VAT treatment that applied prior to the decision, how VAT treatment has changed as a result of the decision and, in conjunction with Revenue and Customs Brief 08 (2015), the transitional arrangements that are currently in place. In particular, the brief makes it clear that it is necessary for an employer to both contract and pay for services in order to be the recipient of the services for VAT purposes.

Revenue and Customs Brief 08 (2015) followed on from this. It considered whether tripartite contracts between employers, service providers and pension scheme trustees could be accepted as evidence that an employer was the recipient of a supply for VAT purposes, enabling them to deduct VAT charged on administration and asset management costs going forward.
Tripartite contracts and Corporation Tax

Although our position on the use of tripartite contracts to obtain a VAT deduction has not changed, concerns were raised recently about the implications this arrangement may have for an employer’s Corporation Tax deduction.

In this context, only costs recognised in the Profit and Loss Account and contributions to pension schemes may attract a deduction for Corporation Tax purposes. Direct payment by an employer of asset management costs do not clearly fall into either of these categories.

Therefore, where an employer pays directly for asset management costs under a tripartite contract our view is that the employer is not entitled to a Corporation Tax deduction.
Latest position on other options

Options other than tripartite contracts have been put forward by advisers and representative bodies.
Supply of scheme administration services by pension trustees to an employer

This arrangement could be used where a pension scheme trustee contracts and pays third party pension service providers. In these circumstances, a pension scheme trustee could contract with an employer to supply them with the service of running the pension scheme on the employer’s behalf. Where the supply to an employer is a taxable supply, then the VAT charged by a trustee to an employer will be deductible by the employer to the extent that it relates to the taxable supplies of the employer. Any VAT a trustee incurs on administration and other general pension scheme related services (including legal, audit or actuarial services) used by it in order to make the onward taxable supply to the employer will be deductible by it in full.

However, where a trustee incurs VAT on asset management services this will have a direct and immediate link to the trustee’s ongoing investment activities. This VAT may also have a direct and immediate link to the supplies made by a trustee to the employer, provided part of the trustee’s supply to the employer of running the pension scheme on their behalf includes asset management services and the services on which the trustee incurs VAT are used for that purpose. If asset management services are put to dual use any deduction by a trustee in respect of the VAT incurred by it on these services will need to reflect this.
VAT grouping

A corporate trustee of a pension scheme can, as the legal representative of that pension scheme, VAT group with an employer provided they meet the eligibility criteria set out in section 43A of the Value Added Tax Act 1994, see chapter 2 of VAT Notice 700/2: group and divisional registration for further guidance. In those circumstances, any supplies made by a trustee acting in that capacity including dealing in the assets of a scheme’s fund(s), are treated as being made by the representative member of the VAT group.

The cost of administration and other general scheme related services that do not have a direct and immediate link to the management of a pension scheme’s assets and therefore the scheme’s investment activity, will be overhead costs of the VAT group and will be deductible in accordance with the activities of the group as a whole.

However, where a VAT group incurs VAT on asset management services this will have a direct and immediate link to the trustee’s investment activity. This VAT may also have a direct and immediate link to the supplies made by the employer provided it is used by the employer to make these supplies. If asset management services are put to dual use any VAT deduction in respect of the VAT incurred on these services will need to reflect this.

Representatives have raised concerns that the effect of the joint and several liability provisions relating to VAT grouping mean that where a corporate trustee is VAT grouped, HM Revenue and Customs would be entitled to recover a VAT debt of the VAT group from the pension scheme assets. Our position is, and remains, that we are unable to recover VAT from the scheme assets except to the extent that the relevant VAT debt is attributable to the administration and operations of the pension scheme. This is set out in paragraph 4.3 of VAT Notice 700/17: Funded Pension Schemes.
Other options

We are still considering representations which have been made more recently, in particular in relation to asset management services and whether there are alternative tripartite structures that would enable a Corporation Tax deduction. Further guidance will be published later this year.
Transitional period extended until 31 December 2016

In the light of recent developments, and in particular the Corporation Tax deduction issues associated with the use of the tripartite arrangements outlined in Revenue and Customs Brief 08(2015), the transitional period will be extended. The period during which taxpayers may continue to use the VAT treatment outlined in VAT Notice 700/17: Funded Pension Schemes (provided the employer and pension scheme trustees agree the same treatment) will be extended until 31 December 2016. Taxpayers may switch to the new arrangements at any time during this period. From 1 January 2017, the VAT treatment outlined in Revenue and Customs Brief 43 (2014) must be applied.

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© Crown Copyright 2015.

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 2015-11-13 12:36:22 in Tax Articles

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