VAT on professional fund management costs – latest news

Introduction

On 26 October 2015, HMRC issued its latest missive in the long running saga regarding the recoverability of VAT on professional fund management costs paid in respect of occupational pension schemes.

In this Alert

• Key points
• Background
• Alternatives to tripartite agreements
• Tripartite contracts and Corporation Tax
• Extension of the transitional period
• Next steps and actions

Key points

• HMRC’s latest Brief 17/15 (deduction of VAT on pension fund management costs), considers alternatives to the use of tripartite agreements as a means of recovering VAT, including the possibility of trustees supplying scheme administration services to an employer and “VAT grouping”.
• Crucially, it also announces a 12-month extension to the current transitional arrangements, so that the VAT treatment outlined in Notice 700/17 can continue to be used until 31 December 2016.
• In addition, HMRC addresses the Corporation Tax implications of tripartite contracts.

Background

In the past, HMRC allowed employers to recover VAT on invoices relating to general administration fees for work commissioned by and delivered to the trustees of UK occupational pension schemes under VAT Notice 700/17: Funded Pension Schemes (2012 version).  Investment management fees were generally not recoverable, except to the extent that these costs were included in a mixed invoice (containing administration and investment management fees).  Where a mixed invoice was delivered, “by way of simplification” HMRC allowed employers to recover 30% of the VAT as administration fees, with the remaining 70% being treated as referable to investment management costs and not recoverable by the employer.

In the wake of two European cases, HMRC changed its stance on VAT and pension schemes. In November 2014, HMRC issued Brief 43 setting out its view that an employer could recover input tax in relation to the management of its pension scheme (“management” covers investment management and day-to-day administration) only if there is contemporaneous evidence that it:

• is the recipient of the services,
• is party to the contract for those services, and
• has paid for them.

See our Alert dated 17 December 2014 for further details.

Following on from this, HMRC issued a further Brief (Brief 8 (2015)) in March 2015 outlining HMRC’s position on the use of tripartite contracts to evidence an employer’s entitlement to deduct VAT paid on services relating to the management of DB schemes.

In the meantime, a transitional period has been in place during which businesses can continue to use the VAT treatment outlined in Notice 700/17 should they choose, provided both employer and trustees agree the same treatment. The transitional period had been scheduled to come to an end on 31 December 2015.

Alternatives to tripartite agreements

Brief 17/15 outlines options other than tripartite contracts which have been put forward by advisers and representative bodies, and sets out HMRC’s latest thinking on these alternatives.

Trustees supplying scheme administration services to an employer

HMRC suggests that, where trustees pay third party pension service providers, they could contract with an employer to supply the service of running the pension scheme on that employer’s behalf. This would mean that any VAT charged by the trustees to the employer would then be deductible (to the extent it relates to the taxable supplies of the employer). VAT incurred by the trustees 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 then be deductible by it in full.

As regards VAT paid in respect of asset management services, such services must be included in the contract between the trustees and employer in order to have a “direct and immediate link” to the trustees’ supply of scheme services to the employer, and thereby be deductible. If, however, the asset management services are put to dual use, and are used for any purpose beyond that of the scheme, a full deduction in respect of the VAT will not be possible.

VAT grouping

Another option is the inclusion of a corporate trustee in the employer’s VAT group, provided that certain eligibility criteria are met. Once included in the VAT group, any supplies in relation to the scheme made by the trustee would be treated as being made by the representative member of the group.

Costs of administration and other general scheme related services would be deductible in accordance with the activities of the group as a whole. As above, if asset management services are put to dual use, any deduction in respect of the VAT incurred on these services would need to be apportioned and so would not be recoverable in full.

It should be noted that, as members of a VAT group are jointly and severally liable for the tax due from the representative member, trustees would want to consider this option and the potential liabilities it might involve carefully.

HMRC also confirms that it is not able to recover VAT from schemes’ assets, except to the extent that a VAT debt is attributable to the administration and operations of that pension scheme.

Other options?

HMRC notes that it is “still considering representations which have been made more recently” in relation to further options.  In particular, HMRC will be examining whether any alternative tripartite structures would enable a Corporation Tax deduction in relation to asset management services. Further guidance will be published on this issue later in the year.

Tripartite contracts and Corporation Tax

HMRC notes that its position on the use of tripartite contracts as a means of recovering VAT has not changed. However, the Brief explicitly addresses concerns raised about the implications of tripartite arrangements for Corporation Tax deduction.

Only costs recognised in the Profit and Loss Account and contributions to pension schemes attract a deduction for Corporation Tax purposes. Direct payment by an employer of asset management costs does not clearly fall into either of these categories.  Therefore, HMRC’s view is that, where an employer pays directly for asset management costs under a tripartite contract, “the employer is not entitled to a Corporation Tax deduction”.

Extension of the transitional period

In the light of recent developments, and in particular the Corporation Tax deduction issues associated with the use of the tripartite arrangements, HMRC has decided to extend the transitional period. The upshot of this is that, provided (as before) that the employer and trustees agree, the VAT treatment outlined in Notice 700/17 can continue to apply until 31 December 2016.

Of course, employers and trustees may switch to new arrangements at any time during the transitional period. Importantly, from 1 January 2017, the VAT treatment outlined in Brief 43 must be applied.

Next steps and actions

HMRC originally intended to provide further guidance “in the summer” on VAT recoverability relating to other types of service (such as legal, actuarial or accounting) and other types of scheme (such as DC or hybrid). Having touched upon other types of service in the Brief, it is unclear whether we can now expect anything else from HMRC.

For the many employers and trustees who have not yet made arrangements to deal with the future recoverability of VAT on pension scheme administration and investment management fees, the extension of the transitional period will no doubt be greatly welcomed. Both parties should now use this period to discuss this issue with their tax and legal advisers.  If you wish to discuss any of these issues with us, please ask your usual Sackers’ contact.