Defined benefit pension schemes: employer input VAT

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        <p>Update </p>
        <p>Changes made to HM Revenue &amp; Customs (HMRC) Manuals in November 2017 make it clear that the existing option to recover input VAT in relation to employer funded pension costs on the basis of a 70:30 split between investment services and administration will continue to be available and will not now be withdrawn from 01 January 2018 (see <a href="https://www.gov.uk/hmrc-internal-manuals/vat-input-tax/vit44600" target="_blank">VIT44600</a>). HMRC guidance in the VAT Input Tax (VIT) Manual notes that &ldquo;in consideration of the difficulties encountered by some taxpayers with implementing options that would allow appropriate deduction of VAT as per PPG, HMRC has come to the view that the existing rules for input tax deduction will continue to be available to taxpayers going forward, together with the newer options following &ldquo;. For further details on the background to the changes, see <a href="http://www.elexica.com/en/legal-topics/tax/26-hmrcs-new-policy-on-vat-and-pension-shcemes">HMRC&rsquo;s new policy on VAT and pension schemes</a>. </p>
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Following on from the guidance released in Revenue & Customs Brief 43/2014 dealing with input VAT recovery in relation to pension schemes, HMRC has issued further guidance specifically on the recovery of input VAT by an employer in relation to a defined benefit (DB) scheme: Revenue & Customs Brief 8/2015.

The new Brief confirms that tripartite contractual arrangements can, in appropriate cases, be used to satisfy the conditions for input VAT recovery by an employer, but also confirms that actual payments of service fees are necessary (rather than simply increased contributions).

Background

In the Revenue & Customs Brief 43/2014, HMRC accepted that an employer may be able to recover input VAT on pension fund management services where it both contracted for and paid for those services. Although the trustees of the pension scheme benefit from pension fund management services, HMRC also accept that the employer also benefits where it has an obligation as part of its staff remuneration package to provide such pension benefits. “Determining which party is the recipient of the supply of services is a fact sensitive question that will depend upon the circumstances in which the transaction took place.” For further information, see “HMRC’s new policy on VAT and pension schemes”.

Tripartite arrangements

HMRC has since received representations that directly contracting for pension fund management services may be difficult from a regulatory perspective in a DB context and employers sought assurance that tripartite arrangements involving the supplier, the pension scheme trustees and the employer will meet the condition that the employer must contract for the services.

Revenue & Customs Brief 8/2015 confirms that, given the unique nature of DB schemes, HMRC accepts that tripartite contracts can be used to demonstrate that the employer is the recipient of a supply of DB pension fund management services.

Accordingly, the employer may be able to deduct input VAT on such services provided that:

• the service provider makes its supplies to the employer (albeit that the contract may recognise that, in the particular regulatory context in which DB schemes operate, the service provider may be appointed by, or on behalf of, the pension scheme trustees)
• the employer directly pays for the services that are supplied under the contract
• the service provider will pursue the employer for payment and only in circumstances where the employer is unlikely to pay (for example, because it has gone into administration) will it recover its fees from the scheme’s funds or the pension scheme trustees
• both the employer and the pension scheme trustees are entitled to seek legal redress in the event of breach of contract, albeit that the liability of the service provider need not be any greater than if the contract were with the pension scheme trustees alone and any restitution, indemnity or settlement payments for which the service provider becomes liable may be payable in whole to the pension scheme trustees for the benefit of the pension scheme (for example in circumstance where the scheme is not fully funded)
• the service provider will provide fund performance reports to the employer on request (subject to the pension scheme trustees being able to stipulate that reports are withheld, for example where there could be a conflict of interest)
• the employer is entitled to terminate the contract, although that may be subject to a condition that they should not do so without the pension scheme trustees prior written consent (this can be in addition to any right that the pension scheme trustees may have to terminate the contract unilaterally).

In addition to the above, HMRC indicate that evidence that the pension scheme trustees agree that it is the employer who is entitled to deduct any VAT incurred on the services will reduce the potential for disputes.

Payment of fees

The Brief points out that for an employer to deduct VAT, it must pay the service provider directly and be issued with a valid VAT invoice. HMRC state that they do not accept that an equivalent increase in contributions to the fund or any payment through the fund constitutes payment by the employer for these purposes.

In addition, if the employer recharges the costs to the pension scheme, that recharge is treated as consideration for an onward taxable supply requiring the payment of output VAT.

Other circumstances

HMRC indicate that they are also looking at the VAT recoverability position relating to other types of services (legal, accounting etc), other types of pension scheme (such as defined contribution) and VAT grouping situations and will release further guidance in the summer.

Transitional period

The transitional period announced in Revenue & Customs Brief 43/2014 will continue to run until 31 December 2015 and is unaffected by the new guidance.

Update

HMRC has since extended the transitional period for using the 70:30 basis of VAT recovery until 31 December 2017. See "HMRC extend transitional period for employer funded pension VAT costs".