HMRC have published their updated policy in relation to VAT recovery by employers for pension schemes. The change in policy is as a result of a European Court of Justice decision from 2013 (PPG Holdings), and may result in businesses being able to recover VAT previously treated as being irrecoverable. It is possible to revisit VAT recovery over the past four years.
Historically, HMRC have sought to distinguish between administration/set up costs of an employees’ pension fund, and the cost of management of the investment activities/assets of the fund. In HMRC’s view VAT on the admin costs was recoverable and VAT on the investment management costs not recoverable. If costs where invoiced from one supplier, HMRC took the view that 30% related to the general management and was recoverable by the employer and 70% related to the management of the investments (HMRC say this would have been recoverable by the pension fund, but it is extremely unlikely that a pension fund would be in a position to recover all, if any, of the VAT).
HMRC’s Brief 06/14 confirms that they have changed the above policy following PPG and now accept that, where a supply of pensions administration and investment management is made from one supplier to the employer, the VAT is recoverable. This is on the proviso that the employer contracts for and bears the cost. If there is a recharge to the pension fund or a set off against contributions, HMRC indicate that the employer can fully recover the VAT but must account for output tax on the recharge to the pension fund (which is likely to be irrecoverable VAT). Therefore although this appears to be good news, it is critical that businesses determine whether the employer entity as opposed to the pension fund will be able/happy to fund the investment management fees without the need to make a recharge or reduce the funding it provides to the pension. Given that many large pension funds currently have significant deficits and given the investment management fees can be significant in value terms, this is a key point to consider before changes are made as any recharge or deemed recharge would effectively put the pension fund back to square one. Similarly the question of corporate tax deductions for the employer arises.
Where an employer receives invoices for separate services, it should review what these services relate to as HMRC have reiterated that, where separate fees are charged solely in relation to investment management of the pension fund’s assets, they do not see this VAT as recoverable. It is unclear from the guidance what stance will be taken in relation to the basic VAT principle of single versus composite supplies – the guidance suggests that the VAT on a single invoice covering both administration and investment advice will be fully recoverable by the employer but if the investment management element is regarded as a single supply with ancillary administration services included, there is a risk HMRC could deny the employer any VAT recovery, meaning the business would be worse off than with the historic 30/70 split.
It is recommended that the VAT recovery policy in relation to your pension scheme is reviewed, along with future arrangements regarding contracting and invoicing from suppliers to ensure that the VAT recovery position is understood and maximised. Pension managers may also wish to consider how the new policy impacts on their supplies. Should you wish to discuss further, please contact Sean McGinness on 01962 735350 or firstname.lastname@example.org