Out-Law News | 15 Sep 2016 | 3:16 pm | 3 min. read
The tax authority confirmed the issue in a newly updated policy announcement that relates to the deduction of VAT on pension fund management costs.
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.
Earlier this month HMRC extended, until 31 December 2017, the current transitional period that applies during which employers and trustees have to bring their pension scheme VAT recovery arrangements into line with the new policy and EU law.
In its most recent update, HMRC said some businesses had raised questions with it about how their corporation tax obligations could be affected by tripartite contract arrangements.
"Only costs recognised in the profit and loss account and contributions to pension schemes may attract a deduction for corporation tax purposes," HMRC said. "Direct payment by an employer of asset management costs do not clearly fall into either of these categories. Therefore, where an employer pays directly for asset management costs under a tripartite contract our view is that the employer is not entitled to a corporation tax deduction."
In its policy statement HMRC also explained how VAT obligations could arise where employers pay trustees to run a pension scheme on their behalf, including providing asset management services.
"Where the supply to an employer is a taxable supply, then the VAT charged by a trustee to an employer will be deductible by the employer to the extent that it relates to the taxable supplies of the employer," HMRC said. "Any VAT a trustee incurs on administration and other general pension scheme related services (including legal, audit or actuarial services) used by it in order to make the onward taxable supply to the employer will be deductible by it in full."
"However, where a trustee incurs VAT on asset management services this will have a direct and immediate link to the trustee’s ongoing investment activities. This VAT may also have a direct and immediate link to the supplies made by a trustee to the employer, provided part of the trustee’s supply to the employer of running the pension scheme on their behalf includes asset management services and the services on which the trustee incurs VAT are used for that purpose. If asset management services are put to dual use any deduction by a trustee in respect of the VAT incurred by it on these services will need to reflect this," it said.
HMRC also explained how 'VAT grouping' can impact on VAT obligations arising from asset management services supplied by pension trustees.
EU VAT rules allow EU countries to group two or more businesses established in the territory of that member state into a single taxable person for VAT purposes, providing that those businesses have close economic, financial and organisational links. UK VAT grouping rules are set out in the 1994 VAT Act, and allow two or more companies or limited liability partnerships to register as a VAT group as long as each is established in the UK and they are under "common control".
"The cost of administration and other general scheme related services that do not have a direct and immediate link to the management of a pension scheme’s assets and therefore the scheme’s investment activity, will be overhead costs of the VAT group and will be deductible in accordance with the activities of the group as a whole," HMRC said.
"However, where a VAT group incurs VAT on asset management services this will have a direct and immediate link to the trustee’s investment activity. This VAT may also have a direct and immediate link to the supplies made by the employer provided it is used by the employer to make these supplies. If asset management services are put to dual use any VAT deduction in respect of the VAT incurred on these services will need to reflect this," it said.
Some companies have raised concern that the practice of VAT grouping could provide the tax authority with a means to recover VAT debt from pension scheme assets. However, HMRC said that it is "unable to recover VAT from the scheme assets except to the extent that the relevant VAT debt is attributable to the administration and operations of the pension scheme".
VAT and indirect tax expert Darren Mellor-Clark of Pinsent Masons, the law firm behind Out-Law.com, said HMRC's latest brief appeared to "add little to the VAT debate which has already taken place with industry".
"Concern is likely to remain that HMRC’s latest postponement puts in doubt a considerable investment of time and resource, on the part of industry, to adapt to HMRC’s new rules following the effective rejection of their policy in the CJEU," Mellor-Clark said. "The corporation tax point, although widely expected, is likely to further disappoint, especially as HMRC give little guidance to their thinking in this complex matter. The interests of long term savings must, surely, be better served by increased pragmatism and clarity."