Employers can now deduct VAT as input tax on both the administration and investment management costs of running their pension schemes. We compare the existing and revised policies and consider what action employers should take in light of this development.
HMRC’s revised VAT policy on pension fund administration and investment management costs confirms that, subject to certain conditions being fulfilled, employers can now deduct VAT as input tax on both the administration and investment management costs of running their pension schemes.
Previous HMRC Policy
Prior to the announcement on 25 November 2014, HMRC’s previous policy had been to distinguish between the costs incurred in relation to the setting up and day to day administration of occupational pension schemes, and the investment management relating to the assets of occupational pension schemes.
HMRC had only 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 therefore had a direct and immediate link to the employer’s business activities.
Employers were not, however, allowed to deduct VAT in relation to the investment management costs as HMRC considered that these costs related solely to the activities of the pension scheme.
In circumstances in which a single invoice was received covering both the administration of the pension scheme and the investment management, HMRC had in place a ‘simplification measure’ which 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.
Revised HMRC Policy
HMRC is now changing its policy on the recovery of input tax in relation to the management of pension schemes. This change follows the European Court of Justice (ECJ) decision in the case of PPG Holdings BV (C-26/12) in which an employer established that a Defined Benefit scheme was entitled to deduct VAT on third party administration and investment management services provided that there was an immediate link between those services and its own taxable supplies.
It is now accepted by HMRC that there are no grounds to treat administration and investment management costs differently. However, certain conditions must be met. In order to recover the input tax for administration and investment management costs, it must be demonstrated that:
- The employer is the recipient of the services, rather than the trustees;
- The employer is party to the relevant contract for the services; and
- The employer had paid for the services.
HMRC has confirmed they will withdraw the 70/30 split simplification measure, although an extension until 31 December 2015 has been provided, during which employers may continue to use this split.
Employers could also use this time to restructure their arrangements to ensure that they fulfil the conditions set out above and can subsequently take advantage of HMRC’s revised policy.
Author: Amanda LeaThis information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.