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.
About the Author
© 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
