As many of you may have been following, VAT on pension costs has been the subject of HMRC focus recently.
The issue here is the extent to which an employer should be entitled to deduct VAT paid on pension fund management services.
The common sense position would be that an employer should be able to treat expenditure on the pension fund as its own business cost. After all, the employer is the party primarily liable to meet the costs of maintaining the pension fund and its benefits.
HMRC did not take such a straightforward view however. It distinguished between costs for administration and management of a staff pension fund which were allowed as part of an employer cost and investment service costs where VAT recovery was very limited indeed. As employers and trustees are only too keenly aware, such costs can be very considerable.
The treatment of VAT on pension costs was maintained by HMRC policy rather than statute. This policy was challenged in the European Court. The two cases (which related to a DB and DC fund) in essence found against the HMRC approach.
Accordingly, guidance has been issued for a new policy to apply from December 2015 with “transitional period” treatment in the interim where seemingly existing rules would continue (notwithstanding that following the ruling it is not clear what this is).
The new policy potentially would allow recovery of all VAT paid on pension services so long as the employer is a party to the relevant contracts for the same. When it was pointed out to HMRC that regulations often require that services are sourced by the trustees (not the employer), modified guidance was issued on tri-partite agreements between employer, trustee and service providers.
HMRC promised further guidance on this and the transitional period “in the summer”. Nothing has yet been forthcoming. Not sure when summertime ends for the good people at the Revenue & Customs but the rest of us looking at our colleagues’ fading tans and the rain lashing at the windows may be forgiven for feeling somewhat autumnal.
While the VATman’s views are awaited, what should be done?
We recommend considering implementing simple form tri-partite agreements to cover the “transitional period” to ensure the best chance of reclaim of as much VAT as possible or waiting for HMRC to decide that summer is indeed over and that it’s time for it to issue its guidance accordingly.
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