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Reclaiming VAT on Pension Scheme costs
HMRC has issued Revenue & Customs Brief 43/2014 setting out its position in connection with the recovery of VAT incurred by companies which establish separate pension schemes. This follows a judgment of the Court of Justice in a Dutch case (PPG Holdings) where the court found that where a company has established a separate pension scheme and has both commissioned and paid for management and administration of the fund, it is entitled to reclaim the VAT incurred on those costs.
Revenue & Customs Brief 43/2014 sets out HMRC's revised position on the recovery of input tax by businesses in relation to the costs incurred in respect of the establishment, management and administration of pension schemes. In a judgment issued in July 2013, the Court of Justice confirmed that where a company had established a pension scheme as a separate legal and fiscal entity in order to protect the pension rights of employees, it is entitled to reclaim VAT incurred on management and administration costs provided that a direct and immediate link exists between the costs in question and the taxable outputs of the business.
Following an earlier Brief, HMRC has consulted with industry representatives and has revised its policy. In essence, HMRC now accepts that there are no grounds to differentiate between costs relating to administration of a fund and costs relating to the management of investments. As such, provided that the employer has contracted to receive the services in question and pays for those services, HMRC will accept that the employer is entitled (and has always been entitled) to reclaim the VAT incurred. However, HMRC also state that they will only accept that the VAT is reclaimable by the employer business if there is contemporaneous evidence that the management or administration services have been provided to the employer. Businesses will be entitled to a full deduction subject to the normal partial exemption and non-business limitations. In addition, HMRC confirm that where an employer business pays the costs directly but recharges the costs to the pension fund, there will be an onward taxable supply by the employer to the fund and VAT will, accordingly, be due.
HMRC has invited affected businesses to submit claims for the recovery of VAT not previously claimed. Such claims will need to be quantified on a VAT period by VAT period basis and will be subject to the normal 4 year capping rules.
Comment – In the majority of cases, schemes established by employers on behalf of their employees are established as Trusts with Trustees appointed to oversee and manage the fund as a separate legal and fiscal entity. In our view, claims to recover VAT incurred on the historic management element will be limited as the services are likely to have been commissioned by the Trustees and not the employer. Similarly, in many cases, the costs incurred by an employer will have been recharged to the fund and any claim for a refund of input VAT will be met with a demand for output VAT on the onward taxable supply.
For further information in relation to any of the issues highlighted in this VAT Alert please contact;
Richard Gilroy [email protected]
Karen Robb [email protected]
Stuart Brodie [email protected]
Andrea Sofield [email protected]
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