In a previous post we looked at two Revenue & Customs Briefs that set out HMRC’s approach in respect of employer input tax deductions on pension fund management costs, following the decisions of the European Court in two significant cases. HMRC has now published further guidance on which types of contract will qualify for employer input tax deductions.
Defined benefit schemes: the previous position
Until the PPG case, a distinction was made between administration costs (for which an employer could obtain an input tax deduction) and investment management costs (where no such deduction was available). In cases where a service provider supplied both administration and investment management services, reflected in a single VAT invoice, HMRC allowed the employer to recover 30% VAT.
In PPG the European Court held that employers could potentially obtain input tax deductions on the costs of pension fund management services (i.e. administration and investment management services) provided to occupational pension schemes, provided that there was a direct and immediate link between the services and the employer’s economic activities as a whole.
The PPG decision was welcome news to many employers, albeit that the circumstances affected by the decision were limited. However, further guidance was clearly needed on the type of arrangements that would meet HMRC’s requirements for the employer to be deemed a recipient to the supply.
The latest Brief provides guidance on the extent to which tripartite contracts between service providers, employers and scheme trustees for pension fund management services relating to defined benefit schemes will be accepted by HMRC as evidence that supplies are made to the employer, making them VAT deductible.
The guidance provides that the tripartite contract must as a minimum provide that:
- the service provider makes its supplies to the employer (the contract may, nevertheless, recognise that the service provider may be appointed by, or on behalf of, the scheme trustees because of regulatory requirements);
- the employer is obliged to directly pay the service provider and the service provider will only pursue the trustees for payment if the employer is unlikely to pay (for example, if the employer is in administration);
- the employer and trustees are entitled to sue the service provider for breach of contract;
- fund performance reports are provided to the employer (by the service provider) on request. However, the contract may provide for the scheme trustees to stipulate that reports are withheld (for example, if there might be a conflict of interest); and
- the employer is entitled to terminate the contract. However, this could be made subject to the scheme trustees’ prior written consent. The trustees may also have the right to terminate the contract.
The way forward
Schemes will have a nine month window (ending on 31 December 2015) to put the new contracts in place. It is the employer who will benefit, so it is likely to be the employer who is driving entry into the tripartite contracts. However all three parties should exercise caution in what is likely to be new territory for each of them.
Whilst on the face of it the opportunity for employers to deduct VAT through the use of tripartite contracts is a positive development, employers, trustees and service providers alike will need to carefully consider the impact which tripartite contracts may have on potential conflicts of interest and the parties’ regulatory obligations.
The subject of the guidance is narrow. However the Brief notes that guidance on the following issues will be issued in the summer:
- other types of service (eg legal, actuarial and accounting);
- other types of pension scheme (eg defined contribution and hybrid);
- VAT groups that include a corporate trustee and the scheme’s sponsoring employer; and
- trustees who charge employers to run their pension scheme.
The Brief demonstrates a relaxation of approach, albeit in limited circumstances. We would be surprised if this summer’s guidance provides significant further concessions.
 Fiscale Eenheid PPG Holdings BV cs te Hoogezand (C-26/12) and ATP Pension Services (C-464/12)
 ‘Revenue & Customs Brief 8(2015): deduction of VAT on pension fund management costs’