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Out-Law News 2 min. read

HMRC extends pension scheme VAT arrangements for a further year


Employers and trustees will have an additional 12 months to bring their pension scheme VAT recovery arrangements into line with HM Revenue and Customs (HMRC) policy and European law, the tax authority has announced.

This is the third extension HMRC has granted to the transitional period, and the tax authority may consider a further extension if firms are not ready to make the changes by the new end date, which is 31 December 2017, according to a policy statement.

Financial services VAT expert Darren Mellor-Clark of Pinsent Masons, the law firm behind Out-Law.com, said that the extension would be "received with mixed views by businesses", particularly those that had already invested in preparing for the changes.

"An extension, now, seems the only option, given that we are less than three months from the expiration of the deadline with significant issues still to be bottomed out," he said.

"However, businesses will be frustrated by HMRC's continuing lack of progress on this issue. Considerable time and cost has been invested by firms in preparing for the changes, and they will be concerned now whether this has been a waste of time. This is the third extension granted by HMRC in relation to this issue, and it seems reasonable to be concerned that it is in danger of taking up permanent residence in the long grass," he said.

HMRC changed its policy on pensions VAT recovery following a number of decisions by the Court of Justice of the European Union (CJEU) about whether defined benefit (DB) pension fund management services are VAT exempt and, if not, who can recover the costs. The new policy no longer distinguishes between administration and investment management costs; which means that VAT can in theory be reclaimed on both, provided that the employer contracts and pays for the services.

Historically, HMRC allowed employers to recover VAT on costs relating to administration, while treating VAT on investment management fees as recoverable only by the pension fund itself. However, in 2013, the CJEU ruled that the Dutch industrial group PPG Holdings BV was entitled to recover VAT on investment management costs as an employer. This was because there was, in the words of the EU VAT requirements, a 'direct and immediate link' between these costs and its general business.

Announcing the further extension, HMRC said that it was "taking longer than expected to reconcile the court decision with pension and financial service regulations, accounting rules and emerging case law". Previous HMRC briefings on the subject have indicated particular complications with regards to an employer's ability to make corporation tax savings.

Guidance that HMRC had been intending to publish on possible options for VAT recovery has also been put on hold while it fully considers the wider implications of these options, according to the latest briefing.

Employers that have already made changes to their VAT recovery processes in preparation for the new rules may continue with these arrangements, or may revert back to their previous arrangements, according to the briefing. However, HMRC has emphasised the need for both employers and trustees to agree on their position and apply the same treatment in order to prevent double VAT recovery.

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