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Out-Law News 2 min. read

Transitional period for pension fund management VAT changes to be extended, says HMRC


The transitional period to allow businesses to adapt to changes to HMRC's policy regarding the deductibility of VAT incurred on pension fund management costs has been extended until 31 December 2016, it has announced. 

HMRC previously announced that a transitional period would be introduced to allow time for businesses to adapt to HMRC's change of policy.  The transitional period was due to end on 31 December 2015; however, HMRC has extended this transitional period for a further 12 months, according to a brief on VAT recovery.

Tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, said that the announcement was "a welcome relief to employers and trustees who were wondering how they would manage to make changes to their existing investment management and their other service provider contracts by the end of this year".

The changes are being introduced following a decision of the Court of Justice of the European Union on this issue. Under the new rules an employer should be entitled to deduct VAT paid on the costs of both administration services of defined benefit pension schemes and investment management services relating to the assets of those schemes, where the services are supplied to the employer. HMRC accepts that an employer can still obtain a VAT deduction where there is a tripartite contract between the pension fund manager, pension scheme trustees and employer

However, HMRC 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 considers that only costs recognised in the profit and loss account, or contributions to pension schemes 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. Therefore, HMRC has confirmed that if the employer pays those costs directly under a tripartite agreement, it is not entitled to a corporation tax deduction.

 “HMRC is taking a harsh view on the question of corporation tax deductibility, and has not fully explained its reasoning," said Heather Self. "While a payment to an investment manager will probably not qualify as a pension scheme contribution, it is not clear why HMRC considers it would not qualify for a deduction on general grounds. This announcement does not help companies to have certainty on their corporation tax position.”

There is specific tax legislation providing corporation tax relief for pension contributions by an employer to a registered pension scheme, where amounts paid (not accrued) are treated as deductible expenses, even if they would otherwise be capital expenses and therefore not ordinarily deductible. The position is less clear with regards to whether other expenses including investment management costs could be eligible for corporation tax relief.

HMRC does state that it is still considering whether there are alternative tripartite structures that would allow a corporation tax deduction for investment management expenses. Further guidance is expected to be published later this year.

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