Pension costs and VAT: action required before 31 December 2016

Published on 2nd Sep 2016

HMRC has now issued further guidance – please see our Stop Press update explaining.

The pensions industry has for some time been expecting HMRC to issue further guidance to clarify the tricky issue of the recoverability of VAT on pension costs. Unfortunately, the guidance has still not been released.  In its absence, we recommend that this issue is included on the agenda for autumn trustee meetings, so that trustees can start to prepare their strategy on how to deal with it once the transitional period ends on 31 December 2016. Employers should also be addressing this with their tax advisers.

The current position is broadly that, from 1 January 2017, a pension scheme employer will have to show that it has received the supply of pension scheme services in order to recover VAT. However, this raises a number of important issues which have yet to be resolved. We have set out in the table below the options currently available for employers and trustees to deal with this, and the advantages and disadvantages of each.

The latest guidance from HMRC, issued earlier this year (click here), states that it is still considering other options, and that further guidance will be published this year. That guidance, when issued, may provide easier ways to deal with this issue going forward, or it could impact on the options below. Nevertheless, given the timing, and while we continue to wait for the HMRC guidance, we recommend that trustees and employers start to consider which of the options below will work for their scheme, and what steps they need to take to implement their chosen option by the start of next year.

Potential solution Detail Advantages Disadvantages
Tripartite
agreements		 The
service provider contracts with both the employer and the trustees

1. Complete
employer VAT recovery for most services (provided that the tripartite
contract and the actual circumstances comply with HMRC’s specific
requirements)

1. HMRC
does not consider asset management costs to be deductible for corporation tax
purposes when paid for by the employer

2.  Not
possible for certain advisory services where there may be a conflict of
interest – such as actuarial and legal services

3. Changing
existing contracts likely to be time consuming and complex
Supply
of services by trustees to employer		 The
trustees could register for VAT and provide the employer with the service of
running the pension scheme.  This
service would be subject to VAT and the VAT on it would be recoverable by the
employer, subject to the usual rules on input tax deduction

1. Complete
employer VAT recovery for most services

2. No
contractual changes required

3. No
conflict of interest

1. Trustees
need to be VAT registered (but this is not too onerous)

2. A
contract needs to be in place between the employer and the trustees

3. VAT
on investment management services may not be recoverable in full
VAT
grouping		 If a
corporate trustee is in place, it could be added to the employer’s VAT
group.  A VAT group is treated as a single entity for VAT
purposes, which means it should not be necessary to show that the employer is
the entity receiving the services in order for it to be able to recover VAT

1. Complete
employer VAT recovery for most services

2. No
contractual changes required

3. No
conflict of interest

4. There
are a number of good reasons other than VAT for having a corporate trustee –
for example reduced risk of personal liability and ease of signing
documents

1. There
is a risk of joint and several liability for VAT group members (although
HMRC has confirmed it will not recover unpaid group VAT from scheme assets)

2. VAT
on investment management services may not be recoverable in full

3. It
may be necessary to show that the corporate trustee is itself providing some
services in order to be VAT grouped

We can help you decide on which of these potential solutions may work best for you.

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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