HMRC's policy of treating pension fund management services provided by insurers as exempt from VAT was due to come to an end on 1 January 2018, at which point these services would be standard rated as is already the case for pension fund management services provided by non-insurers. It has now confirmed to the Institute of Chartered Accountants in England and Wales (ICAEW) that the change will be further delayed, potentially until 2019.
"Industry representatives have…told us that more time is required by insurers to implement these changes and we have agreed to postpone the 1 January 2018 commencement date pending HMRC consideration of industry proposals for a revised date sometime later in 2018 or in the first half of 2019," HMRC said in a statement, provided to the ICAEW.
"The revised implementation date will be notified shortly and the HMRC VATINS guidance will be updated to include these changes," it said.
“The pensions industry will, to some extent, be pleased that HMRC has listened to its appeals for a longer implementation period,” said Darren Mellor-Clark, indirect tax expert at Pinsent Masons, the law firm behind Out-Law.com. “However, the fundamental problem of the withdrawal of the exemption remains a disappointment for the industry, which is likely to be costly for pension savers in the long term.”
HMRC has also updated its internal manual on how VAT should be calculated for defined benefit (DB) occupational pension schemes to provide further guidance on how the changes will be enforced. The guidance indicates that employers will need to be included in the contractual arrangements governing the provision of the investment services in order to be permitted to recover the VAT paid on the costs of those services. Pension regulations require the trustees of the scheme to contract for these services.
Employers could choose to enter into 'tripartite' contracts along with the trustees and management services provider, according to the guidance. The guidance then goes into detail about what minimum requirements these tripartite contracts must have in order to show that it is the employer who "contracts and pays for the services". Alternatively, they could adopt "other contractual arrangements", such as the use of VAT grouping or entering into a contract with the trustees to reimburse them for the costs incurred from third party providers via a VAT invoice. However most of these options have significant tax and operational issues in their implementation, a number of which have been discussed at length with HMRC since the PPG judgment was released, according to Mellor-Clark.
"The new guidance appears to abandon any attempt at resolution of these issues," he said.
"Of course, employers could opt not to recover VAT on fund management services and continue only to recover VAT on costs relating to administration of the pension fund. This would leave VAT recovery on such costs to be undertaken in the pension funds themselves. Such an approach leads to the comparatively lower VAT recovery for funds that was the subject of the PPG litigation in the first place," he said.
For services combining investment management and administration, employers can continue to use HMRC’s old '70/30' rule, allowing them to treat 30% of the total cost of services as associated with administration, if the same third party provides both administration and investment management services. Until recently, HMRC had indicated that this administrative easement would be withdrawn as a result of the PPG judgment.
For administration services, the latest guidance appears to suggest that HMRC will continue to adopt its pre-PPG policy of general acceptance that the associated VAT incurred is, as a general principle, properly recoverable by the employer. The main requirement for recovery by the employer is possession of a valid VAT invoice.
HMRC was required to change its policy on pensions VAT recovery following a number of decisions by the Court of Justice of the European Union (CJEU) about whether 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 only allowed employers to recover VAT on costs relating to administration, while VAT on investment management fees was 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 the VAT on investment management costs as an employer, as there was a "direct and immediate link" between these costs and its general business.
“One cannot help concluding that HMRC has been confounded by the complexity of implementing the PPG decision while at the same time locating a 'line in the sand' to defend against retrospective claims by employers," said Mellor-Clark. "Against this background it would appear that HMRC has declared victory, planted the flag and executed a hurried retreat."
"Given that the three years of discussion with HMRC appear to have brought us full circle to the original starting point, many will question the purpose of the whole exercise and whether HMRC will take Brexit as the opportunity to disregard and displace case-law of the CJEU of which it disapproves,” he said.