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VAT recovery changes: an opportunity for employers and pension funds to review arrangements

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    03-02-2014

    HMRC has today announced changes to the VAT recovery position of employers who pay VAT on services relating to the administration and management of a defined benefit pension scheme.

    These changes follow the judgment on 18 July 2012 of the Court of Justice of the European Union (CJEU) in the Dutch case: Case C-26/12 PPG Holdings BV. The Court held that VAT charged on fund management and administration services provided to an employer for the purposes of a legally and fiscally separate pension fund could be deducted by the employer.

    This represents a major change for the UK VAT treatment of pension fund managers’ costs. Hitherto, HMRC has not permitted the employer to recover the VAT on investment activity costs, but they have allowed, in certain circumstances, recovery of the costs associated with the setting up and day to day administration of the pension fund. Where fund managers issued a single VAT invoice for both general management and investment management HMRC has generally allowed the employer to recover 30% of the VAT invoiced.

    HMRC has now withdrawn the so called 70/30 split treatment of fund managers’ costs. In the light of PPG, HMRC has taken a very narrow approach, but will accept retrospective claims for overpaid VAT where the fund manager’s services for both operational and investment management are supplied to the employer.

    The prospective changes that have been announced today are likely to represent an additional costs to employers of running their pension funds. However, the judgement of the CJEU in PPG does represent an opportunity for employers and the pension funds themselves to consider the arrangements which they currently operate, particularly as most UK pensions operate under a trust. Any changes that employers may consider in the light of PPG need to be mindful not only of the tax position but that of the pension trust itself.

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