Defined benefit schemes: HMRC’S approach before and after the Court’s decision (PPG)
The first paper sets out the approach of HMRC following the decision in the case , which concerned input tax recovery on defined benefit pension scheme related costs.
Before PPG, HMRC allowed employers to deduct VAT incurred in relation to the general administration costs of an occupational pension scheme. This was because these costs were considered to be overheads of the employer and had an immediate and direct link to the employer’s business activities. However, employers could not deduct VAT incurred in relation to the costs of investment management services provided in respect of those schemes. Where invoices related to both administration and investment services, HMRC operated a 70/30 rule whereby employers could treat 70% of the invoices as an investment expense and 30% as an administration expense.
The European Court decided that the employer could deduct VAT on the services received, namely services relating to the administration of pensions and the investment management of the pension scheme’s assets. As a result of this decision, HMRC will no longer make a distinction between administration and investment services and, therefore, will cease to apply a blanket exclusion on the recovery, by employers, of VAT on investment management services.
HMRC has set out criteria to assist in deciding whether an employer can recover the VAT incurred on services provided to an occupational pension scheme. The conditions are detailed in the brief and state there must be ‘contemporaneous evidence that the services are provided to the employer and, in particular, the employer is a party to the contract for those services and has paid for them’. In many defined benefit schemes the investment costs are a trustee rather than an employer expense and so, for past expenses, this change in stance may be of limited application.
Defined contribution schemes: HMRC’s approach before and after the Court’s decision (ATP)
The second paper relates to the approach of HMRC following the decision in the case of ATP which concerned the treatment, for VAT purposes, of services provided in respect of the management of defined contribution pension schemes.
Before ATP, HMRC did not allow pension schemes to be regarded as special investment funds (SIF). As a result, investment services provided in connection with all types of pension schemes were treated as falling outside of the VAT exemption for fund management services.
The European Court decided that a pension scheme which pooled investments from a number of defined contribution pension schemes could be a SIF, and so fund management services provided to it may be exempt from VAT. HMRC has set out a number of characteristics in its brief which a scheme must meet to be regarded as a SIF and therefore benefit from the VAT exemption. These include that the fund must contain the pooled funds of several pension scheme customers, which again means that it may be of limited effect. Many defined contribution schemes are invested in insurance policies or pooled investment funds where it is unlikely that the employer will have incurred VAT, which can now be recovered.
Employers should consider the extent to which they can reclaim VAT by considering the criteria set out in the briefs published by HMRC. If employers believe they meet the criteria, VAT Notice VAT 700/45 explains how to claim a VAT refund. It is possible to claim VAT which has been overpaid in the four years prior to the date of making the claim.
In the future, employers should review their VAT arrangements and fee structures, mainly because of the references in HMRC’s first brief that the identity of the party which commissions and pays for the services is critical as to whether an exemption is available.
 ‘Revenue and Customs Brief 43 (2014): VAT on pension fund management costs’ and ‘Revenue and Customs Brief 44 (2014): VAT treatment of pension fund management services’
 Fiscale Eenheid PPG Holdings BV cs te Hoogezand (C-26/12) and ATP Pension Services (C-464/12)
 Fund management services provided to a SIF are exempt from VAT and are fully explained in Article 13(B)(d)(6) of the Sixth VAT Directive.