HMRC has now published a further Brief that extends the window to put new arrangements in place to 31 December 2016 and provides two further options that enable an employer to deduct input tax on pension fund management costs.
Defined benefit schemes: until PPG
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). If a single invoice provided for both types of costs, 30% of the invoice could be apportioned to administration services and VAT recovered on this element.
The effect of PPG is that an employer is entitled to deduct VAT on third-party administration and investment management services provided to occupational pension schemes provided that there is a direct and immediate link between those services and the employer’s own taxable supplies.
In March this year HMRC provided guidance on the extent to which tripartite contracts between service providers, employers and scheme trustees for pension fund management services would be accepted by HMRC as evidence that supplies are made to the employer (thus making them VAT deductible). The guidance specified a number of minimum requirements for tripartite contracts including that the service provider must make its supplies to the employer and the employer must be obliged to directly pay the service provider. For further details on this guidance see our previous blog.
The latest Brief sets out two options, other than tripartite contracts, that enable employers to deduct input tax on pension fund management costs as follows:
(1) Supply of scheme administration services by pension trustees to an employer.
The Brief provides that if a pension scheme trustee contracts and pays third party pension service providers, the trustee could then contract with the employer to supply it with the service of running the pension scheme on the employer’s behalf. Any VAT paid by the employer to the trustee would then be deductible by the employer to the extent that it related to taxable supplies. Any VAT incurred by the trustee on payments to third parties for administration and other services would also be deductible in full by the trustee. VAT incurred by the trustee on asset management services would have a direct and immediate link to the ongoing investment activities of the trustee. Provided that the trustee’s supply to the employer (of running the employer’s scheme) includes asset management services, VAT on asset management services will also have a direct and immediate link to the supplies made by the trustee and be recoverable.
(2) VAT grouping.
If a corporate trustee is in the same VAT group as an employer, any input tax on the costs of administration and other general pension scheme related services that do not have a direct and immediate link to the management of the pension scheme’s assets will be subject to the group’s partial exemption method.
Any input tax incurred by the group on asset management services will have a direct and immediate link to the trustee’s investment activity and may also have such a link to the supplies made to the employer. If asset management services are put to dual use any VAT reduction must be apportioned to reflect this.
HMRC confirmed that where a corporate trustee is VAT grouped it does not consider it would be able to recover a VAT debt of the VAT group from the pension scheme assets except to the extent to which the relevant VAT debt is attributable to the administration and operations of the pension scheme.
HMRC is still considering other options that may allow employers to deduct input tax and will publish further guidance later this year.
Extension of transitional period
The Brief also announces an extension to the transitional period to put in place arrangements so as to maximise input tax recovery on pension scheme administration and investment costs to 31 December 2016. This extension will be welcome news to many employers who may wish to await further guidance before putting in place any new arrangements.
 Fiscale Eenheid PPG Holdings BV cs te Hoogezand (C-26/12) and ATP Pension Scheme Services (C-464/12)
 Revenue and Customs Brief 17/15: deduction of VAT on pension fund management costs
 Revenue and Customs Brief 8 (2015): deduction of VAT n pension fund management costs