HM Revenue and Customs (HMRC) has changed its policy on the recovery of input tax paid on the management of pension funds, following a decision by the Court of Justice of the European Union (CJEU).
In the case Fiscale Eenheid PPG Holdings BC cs te Hoogezand (PPG), a Dutch employer, PPG, established a defined benefit (DB) pension scheme for its employees.
PPG received pension administration and investment management services from third-party organisations, for which it paid the cost of these services and did not pass the costs on to the pension fund. However, it did deduct the VAT it paid on the administration and management fees as input tax.
The Dutch tax authorities challenged this position, PPG appealed and the Dutch court referred two questions to the CJEU:
- Can an employer deduct the VAT incurred by it on administration and fund management services suppled to it in relation to the operation of a separate pension fund established for the benefit of its employees?
- Can the DB pension fund in question be classified as a ’special investment fund’ so that the management of the fund is exempt from VAT?
The CJEU reiterated in the PPG case that, in order to deduct the VAT incurred on a cost, an employer must establish a direct and immediate link between the supply received and the taxable supplies that the organisation makes.
To date, HMRC has allowed UK VAT-registered employers to deduct input tax to the general management of a workplace pension fund, but VAT incurred on investment management services has not been treated as VAT that can be recoverable by the employer. Instead, it has been treated as VAT of the pension fund.
Where there is a single invoice covering administration and investment management services, HMRC has permitted employers to recover VAT on a 30/70 split.
As a result of the CJEU ruling, HMRC has changed its policy on the recovery of input tax in relation to the management of pension funds. This means that there are circumstances where employers may be able to claim input tax in relation to pension funds where they could not previously.
HMRC will also allow a period of six months to allow employers to adapt to the changes.
Pauline Hawkes-Bunyan, VAT partner at Deloitte, said: “The brief is significant and could affect all employers with trust-based pension schemes.
“Employers should review the VAT recovery arrangements currently in place for pension fund management services (administration and investment related) provided to trust-based schemes.
“This will allow them to see whether claims should be submitted for under-recovered VAT and for arrangements in the future. This decision will also provide greater clarity for those that have already submitted claims.
“Organisation’s with pension funds will need to determine the impact of HMRC’s brief on their VAT recovery position as this could result in a cost saving benefit to them.”