The position in relation to the recoverability of VAT on professional fees paid in respect of occupational pension schemes has been in the spotlight recently.
HMRC has issued two Briefs, Brief 06/14 and Brief 22/14. which suggest that VAT on certain professional fees may no longer be recoverable by the employer. These Briefs cover both the VAT treatment of pension scheme administration and fund management services.
In this Alert:
- Historically, HMRC has allowed employers to recover VAT on invoices for professional fees addressed to (and paid by) the trustees.
- By contrast, HMRC has not previously allowed employers to recover VAT on investment management fees in the same way except to the extent such fees were covered by mixed invoices.
- Following two recent CJEU cases, HMRC has issued two Briefs concerning VAT on administration and investment management fees.
- As a result of these Briefs, it may no longer be possible for the employer to recover VAT on invoices delivered to the trustees, even on fees relating to administration. Fees in relation to investment fees may be recoverable in very limited circumstances.
- However, we are waiting for further guidance from HMRC.
Recent CJEU cases
- In the July 2013 decision in PPG Holdings BV. the CJEU ruled that an employer with a DB pension scheme is, as a taxable person, entitled to deduct the VAT paid on services relating to the management and operation of a pension fund set up for employees and former employees (both day-to-day management costs and investment management fees). The court confirmed that input tax recovery is permitted where there is a “direct and immediate link” between the cost of these services and the employer’s economic activity as a whole. HMRC have interpreted this judgment narrowly in Brief 06/14.
- In March 2014, in ATP PensionService the CJEU concluded that a DC scheme could be a “special investment trust”, if certain conditions are met. Although it is for the Member States to define “special investment funds”, the CJEU stated that: “The essential characteristic of a special investment fund is the pooling of assets of several beneficiaries, enabling the risk to be borne by those beneficiaries to be spread over a range of securities.” We are still waiting for HMRC to interpret this decision, but if a typical UK DC scheme (either trust- or contract-based) meets this definition, the fees for “management of special investment trusts” would be exempt from VAT.
In the past, HMRC has allowed employers to recover VAT on invoices for general administration fees for work commissioned by and delivered to the trustees of UK occupational pension schemes under Notice 700/17 .
By contrast, investment management fees were generally not recoverable except to the extent that these costs were included on a mixed invoice (containing
administration and investment management fees). Where a mixed invoice was delivered, HMRC “by way of simplification” allowed employers to recover 30% of the VAT as administration fees. The remaining 70% was treated as referable to investment management costs and was not recoverable.
Investment management fees
Following PPG Holdings BV, HMRC issued Brief 06/14 on 3 February 2014.
Brief 06/14 stated that, in future, investment management fees may be recoverable by the employer in certain limited circumstances, where there is a “direct and immediate link” between the supply received and the taxable supplies of the business.
But this Brief also withdrew the ability to agree a 70/30 split on mixed invoices (allowing for a six month transitional period for advisers to change billing arrangements).
Under Notice 700/17, HMRC allowed the employer to recover VAT on administration fees paid by pension scheme trustees on the basis that these costs were the costs of the employer in running the scheme, and therefore a legitimate expense of the employer.
HMRC Brief 06/14 withdrew Notice 700/17 and stated that HMRC was changing its policy for DB schemes as a result of the PPG case. Consequently, it appeared that VAT on invoices for professional fees in relation to DB schemes that are addressed to (and paid by) the trustees, would not be recoverable by the employer. The VAT may be recoverable by the trustees but, in our experience, not many trustees are registered for VAT.
Brief 06/14 did not apply to DC schemes as the judgment in the ATP case had not been delivered by the time the Brief had been issued. Therefore, such fees remain recoverable.
What is the latest news?
On 27 May 2014, HMRC published Brief 22/14 in which it explains its intention to review Brief 06/14. HMRC notes it has had discussions with various industry representatives as to how the new policy will apply since the publication of Brief 06/14. HMRC is now planning to take account of both the PPG and ATP cases and will consider whether to make any changes to the guidance outlined in Brief 06/14.
HMRC intends to issue further guidance in the autumn on how both judgments are to be implemented, including a transitional period in which to make any changes. As a result, the latest Brief 22/14 has extended the transitional period for the treatment of mixed invoices until that further guidance is issued.
Unhelpfully, it makes no mention of how administration fees for DB scheme should be treated, during this further transitional period. In particular, HMRC has not expressly withdrawn Brief 06/14 in which it announced it was changing its policy on recoverability. It is therefore possible that VAT on such fees will not be recoverable.
Administration fees for DC scheme remain recoverable under Notice 700/17.
Scheme sponsors should discuss arrangements for recovering VAT with their tax advisers.