27 Nov 2014

VAT: action needed - now!

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HMRC has kept us waiting for some time for its response to a couple of European Court judgments - but it has now landed and action needs to be taken!

The underlying issue here is whether sponsors of occupational pension schemes can reclaim as their own input VAT the VAT on their pension scheme's investment management costs. HMRC's policy has consistently been that sponsors could "deduct VAT incurred in relation to the administration of an occupational pension scheme on the basis that these costs were overheads of the employer and thus had a direct and immediate link to the employer's business activities. In respect of investment management costs, HMRC considered these costs to relate solely to the activities of the pension scheme." Accordingly, sponsors have not been allowed to recover VAT on investment management costs because there was no VATable supply to the sponsor.

Defined Benefit Schemes
Following a ruling from the European Court, HMRC has changed its policy so that sponsors of defined benefit schemes may now be able to recover VAT on investment management costs. However, HMRC has said that it "will not accept that the VAT incurred in relation to a pension scheme is deductible by an employer unless there is contemporaneous evidence that the services are provided to the employer and, in particular, the employer is a party to the contract for those services and has paid for them."

If HMRC adopts the same approach in practice to investment management costs as it has previously done in relation to other administration costs, sponsors should give careful thought to their contractual arrangements and, in particular, invoicing procedures in relation to investment management services.

As soon as possible, therefore, sponsors should discuss with their pension scheme's trustees and investment managers whether existing arrangements and procedures continue to be appropriate in light of HMRC's new policy.

Defined Contribution Schemes
The position has also changed for defined contribution schemes. HMRC has followed a separate judgment of the European Court which ruled that defined contribution schemes are special investment funds and so are exempt from VAT.

As such, VAT previously charged in relation to defined contribution schemes can now be reclaimed (subject to a four year limitation period) and no further VAT should be charged going forwards.

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Mark Catchpole

Mark Catchpole
Partner

T:  +44 20 7809 2059 M:  +44 7767 624 975 Email Mark | Vcard Office:  London