Transitional period extended until December 2017
We continue to await the publication of a definitive guide to the approach HMRC will take towards the deduction of VAT on pension scheme management costs; the current transitional period has been extended to 31 December 2017 and perhaps even beyond.
In a 2014 blog post, we wrote about this subject and the changes necessitated by the decision of the European Court of Justice (ECJ) in the PPG case . Since then, HMRC has set out its position on the various options employers and pension schemes may wish to take when structuring the way in which they receive services to enable them to deduct VAT charged on administration and investment management costs.
Last week, HMRC published Revenue and Customs Brief 14 which further extends the transitional period, during which employers can consider their options and if they wish, continue to deduct VAT in the 70/30 split which was applied before PPG, as set out below.
What happened before the PPG decision?
HMRC previously allowed employers to deduct VAT incurred in relation to the establishment and administration of an occupational pension scheme, viewing these costs as overheads of the employer.
A differentiation was made between administration costs (in respect of which an employer could deduct VAT) and investment management costs (in respect of which it could not).
Where a single invoice covered both the administration of the pension scheme and the management of its investments, HMRC allowed the employer to deduct 30% of the VAT as relating to the administration of the scheme. If the trustees were VAT registered (which is often not the case), they could claim the remaining 70% as relating to the investment management.
The PPG decision
In PPG, the ECJ determined that an employer could deduct the VAT it paid on services received, namely services relating to the administration of pensions and the investment management of a pension scheme’s assets. So HMRC will no longer make a distinction between administration and investment services and will cease to apply a blanket exclusion on the recovery by employers of VAT on investment management services. The question facing HMRC, sponsoring employers and occupational pension schemes now is how should arrangements for the provision of services be structured, to enable VAT to be deducted?
How should sponsoring employers structure their arrangements for the receipt and payment of these services?
In a 2015 Revenue and Customs Brief , HMRC published its views on three options employers may choose for structuring their affairs, while acknowledging that there are other options under consideration.
One option is the use of tripartite contracts (between service provider, employer and scheme trustees). The others are VAT grouping and the supply of scheme administration services by the pension scheme trustees to the employer. Concerns have been raised about the options – for example, the use of tripartite contracts is a little artificial and may have unfavourable Corporation Tax consequences for the employer.
The consideration of these options in further detail, of other possible options and of the impact of the Referendum result is taking some time; it was widely anticipated that a further extension of the transitional period would be announced. Employers which have already made changes to their arrangements with the intention of complying with the PPG decision can choose to revert to making deductions based on the 70/30 approach during the transitional period. Employers and pension scheme trustees should consider their position carefully, whatever approach they adopt.
While there remains uncertainty as to which structures will be acceptable to HMRC, employers will nevertheless have to implement an HMRC-approved structure before the end of the transitional period – which could remain at 31 December 2017 or be pushed back again. Failure to implement such a structure could lead to penalties for the over-recovering of input tax.
This post was contributed by Patricia Bailey. For more information, email email@example.com.
 PPG Holdings BV (Case C-26/12)
 Revenue and Customs Brief 17 (2015): deduction of VAT on pension fund management costs