Pension scheme administration costs – Getting relief for VAT and corporation tax
HMRC has recently issued updated guidance on an employer’s entitlement to deduct VAT paid on services relating to the administration of defined benefit pension schemes and the management of their assets.
The guidance that has been issued also covers whether corporation tax relief is available for costs incurred under tripartite contracts between employers, service providers and pension scheme trustees.
This follows on from the guidance in Revenue and Customs Brief 43/14 which was published last November in response to the European case of PPG (Fiscale Eenheid PPG Holdings BV cs te Hoogezand (CJEU C-26/12)). ThePPGcase concerned input tax recovery and considered whether an employer could recover some or all of the VAT incurred on the costs of setting up and running a legally separate employee pension scheme. The Court accepted that VAT recovery was permissible on some costs, but didn’t set down any prescriptive basis for determining how to calculate the recoverable element. The judgment indicates that each employer should apply the basic rules of VAT to reach a decision.
Historically, the UK has allowed employers to treat 30% of the total pension management fees as relating to scheme administration and recover input tax on this element. This is a long-standing concessionary treatment that recognises the difficulties for both employers and HMRC in this area. The PPG decision led HMRC to reconsider this approach and raised a number of issues about existing practices. The issues highlighted in Revenue and Customs Brief 43/14 are:
- Is there a supply of services to the employer? This is a question of fact and the position is dependent on the contractual terms between, on the one hand, the pension administrator supplying its services and, on the other, the employer and/or the pension scheme.
- Is there a valid VAT invoice to support the claim for input tax recovery by the employer? The usual arrangements would be for the pension administrator to invoice its costs to the pension scheme, with the employer receiving no invoice for its share of the costs. In these circumstances there is no valid VAT invoice to support a claim for input VAT relief.
The publication of the Brief led to informal consultations with the pensions industry and an updated Revenue and Customs Brief 08/15. The outcome was confirmation from HMRC that the 30%/70% split previously adopted would only apply up until 31 December 2015.
That date is now fast approaching and the recent Revenue and Customs Brief 17/15 has further extended the transitional arrangements to 31 December 2016. In the Brief, HMRC has also provided its view on whether an employer is entitled to corporation tax relief on the costs associated with administering and managing a pension fund.
HMRC has outlined that only pension contributions and other costs recognised in the profit and loss account are deductible against corporation tax profits. In HMRC's view direct payment by an employer of investment management costs does not fall into either of these categories. HMRC has confirmed that if the employer pays those costs directly under a tripartite agreement between the administrator, the pension scheme and the employer, it is not entitled to a corporation tax deduction.
The Brief also covers some additional issues:
- An alternative to a tripartite arrangement, where the supply of scheme administration services is made by the pension trustees to the employer
- VAT grouping issues
Although there’s now certainty on the position to 31 December 2016, the latest guidance leaves the way forward unclear. Employers, pension fund trustees and pension fund managers operating defined benefit schemes should consider the impact of the updated guidance with their advisers– but they’ll have to wait for a longer term solution to the issues.