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Pensions Update

VAT recovery for DB schemes – the latest position

In 2013, the Court of Justice of the European Union in the PPG Holdings Case decided that employers with DB schemes could reclaim VAT incurred for the administration and management costs of those schemes. Needless to say, such changes to what VAT can be recovered will result in a colossal reduction in the amount of VAT HMRC can hold on to.

HMRC, in an attempt to clarify the way in which this judgment would affect English law, published a briefing to address these new VAT rules. The briefing, although intended to provide clear guidance, proposed a complicated system whereby DB scheme providers would, for example, have to enter into tripartite agreements with the employer and trustee before the VAT could be reclaimed. The Association of Pensions Lawyers raised well founded concerns with this approach, but then proceeded to suggest an equally or even more complicated alternative approach. This was that a new subsidiary company (a nominee type company) should be set up to replace the employer within the tripartite agreement. None of this seemed very satisfactory in real terms and extremely hard to implement by 31 December 2016 – the implementation cut off date given by HMRC.

Recognising this, HMRC recently announced in its Policy Paper of September that the new VAT rules in relation to DB schemes will not apply until 31 December 2017, a full year after the original estimated date of implementation.

The delay in the finalising of these new rules has been caused by a number of factors including the complexity of pensions regulation and of course, the Brexit vote. After all, it may not make sense to implement an EU judgment that will cost HMRC millions of pounds if we are on the brink of waving a final farewell to the EU.

Although this delay may be disappointing to DB schemes eager to recover those extra pounds of VAT as soon as possible, there is a silver lining. Instead of having to make rushed and complicated changes to their VAT arrangements now, employers, trustees and providers of DB schemes can concentrate on other matters. The HMRC policy notes, “Some taxpayers may have already made changes to their structure and/or contractual arrangements to comply with the judgment. Provided the employer and pension scheme trustees agree and both apply the same treatment, these taxpayers may continue with those arrangements. If they wish, they may choose to revert back to the previous treatment during the transitional period. Taxpayers are advised, however, that adopting alternative structures to comply with the VAT requirements could have wider implications, in particular in respect of regulatory requirements and Corporation Tax deductions.”

Given this, it seems sensible for trustees, employers and providers to keep on with the waiting game, rather than implementing new structures now. Clients may also want to move back from new tax structures that they have been encouraged to enter into in the past to allow for the changes to VAT recovery and we would happy to advise on this.“

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September 2016

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