Following HMRC’s recent review of its treatment of VAT on services provided to funded pension schemes, which led it to extend the transitional period during which its “old” approach remained valid, HMRC has now updated its internal guidance. In summary:
- the old approach described in VAT Notice 700/17 will continue to be available indefinitely and
- the various alternative approaches will also be acceptable.
It will, therefore, fall to individual schemes and their sponsoring employers to decide which approach works best for them.
VAT Notice 700/17
The Notice states that, for a VAT-registered employer, the VAT incurred in the day-to-day management of the pension scheme counts as input tax, even where responsibility for that management lies with trustees. However, it goes on to draw a distinction between “management” and “investment”. Investment activity is seen as separate from the employer’s business, so VAT on investment fees cannot be counted as input tax.
The Notice specifies the following activities in relation to which employers cannot reclaim VAT incurred:
- advice connected with making investments,
- brokerage charges,
- rent and service charge collection for property holdings,
- records in connection with property investments,
- professional trustee services,
- legal services paid on behalf of representative beneficiaries and
- custodian charges.
Where invoices relate to both investment and management, and no distinction is made between the two, employers may continue to claim 30% of the total VAT as input tax.
Tripartite contracts
One potential solution that has been considered in the last few years since HMRC threatened to withdraw the approach described above is to add the sponsoring employer(s) as a party to contracts between the trustees and their advisers. Such contracts must satisfy certain conditions laid down by HMRC, such as the adviser addressing invoices to the employer and the employer paying for all services directly. This option will remain available, although the following drawbacks have been identified:
- some services have to be provided to the trustees only – for example Scheme Actuary services – and
- the tripartite agreement may affect the deductibility of pension scheme costs for corporation tax.
Trustees register for VAT and supply services to the employer
In situations where scheme advisers’ fees are paid from the scheme’s assets, the trustees could contract with the employer to supply these services to that employer. The trustees would charge VAT, which would then be deductible by the employer. However, there may still be circumstances in which the VAT incurred on investment management costs would not be fully deductible.
Joining the employer’s VAT group
This option is available where the trustee is a corporate body. If the corporate trustee is included in the employer’s VAT group, VAT may be reclaimed on services provided to the scheme even where those are paid for out of the fund. Again, there may be restrictions on the recovery of VAT on investment management costs.
Members of a VAT group are jointly and severally liable for the tax due, so trustees would need to consider the potential liabilities that might arise from this.
Fund management provided by insurers to defined benefit schemes
Separately, HMRC has announced – in Revenue and Customs Brief 3 (2017) – that insurance companies will no longer be allowed to treat their fund management services as exempt from VAT. Originally this was intended to take effect from 1 January 2018 but it has now been put back to 1 April 2019. However, we understand that several insurers are in dialogue with HMRC to establish precisely which types of fund will be affected.