In our September 2013 eBulletin we reviewed the recent Court of Justice of the European Union's ("CJEU") decision in PPG1 in the light of the Court's earlier decision in the Wheels2 case.
On 3 February 2014, HMRC issued "Revenue & Customs Brief 6/2014" which sets out a change in HMRC's policy regarding the recoverability of VAT in relation to the management of defined-benefit occupational pension funds. This change in policy will be reflected in an update to HMRC's "Public Notice 700/17 Funded Pension Schemes".
Previous HMRC policy
Previous HMRC policy on the management of defined-benefit occupational pension funds has distinguished between costs incurred in relation to the:
(a) setting up and day to day administration of occupational pension funds; and
(b) management of the investment activities of the fund.
Historically, HMRC has permitted employers to recover VAT incurred on administrative costs on the basis that such costs constitute overheads of the employer and thus have the necessary direct and immediate link to the employer's business activities required by the VAT recovery system. By contrast, costs incurred as part of the management of a pension fund's investment activities have been viewed as costs directly attributable to the activities of the pension fund.
Finally, where an employer submitted a single invoice which failed to distinguish administration and fund management costs, HMRC's rule of thumb was to attribute 30% of the VAT to the general management costs of the scheme and 70% to investment management costs. It fell to the employer to provide evidence that a greater proportion of the invoice related to administrative expenses than HMRC's 30% assumption.
New HMRC policy
Following the CJEU's judgment in PPG, HMRC's focus continues to be on establishing a direct and immediate link between the supply received and the taxable supplies that the business makes. To establish such a link, the test is whether the cost of the input services is incorporated in the price of the supplies made by the business. Those supplies can either take the form of:
(i) specific supplies or groups of supplies; or
(ii) incorporation into the price of all the supplies made by the business.
However, in contrast to their previous policy, HMRC now recognises that services that go beyond the management of the investments may constitute general costs and thus may be VAT recoverable. In such cases, the employer would need to receive the supply of the service to qualify for the VAT to be recoverable. HMRC will not however accept claims for the recovery of VAT where supplies were not made to the employer or where the service supplied relates to investment management services only.
Wedlake Bell's thoughts.....
The new HMRC policy goes some way towards clarifying how the CJEU's decision in PPG will impact UK defined benefit pension schemes. However, query how much of an effect this change in policy will have: Almost all new pension schemes being established to comply with the new auto-enrolment regime will be defined contribution and therefore the new HMRC policy will not apply.
Certainly, in the context of defined benefit schemes, the new HMRC policy offers some scope for employers (if they have not already done so) to arrange their affairs so that VAT on the general costs of a pension scheme is recoverable. However, in line with our conclusions in our September 2014 eBulletin, HMRC's revised policy maintains its strict approach regarding the non-recoverability of VAT on investment management services.
The CJEU's forthcoming decision in ATP3 will consider the recoverability of VAT in the context of defined contribution schemes. As such, the ATP judgment is going to be of greater significance to UK employers looking to minimise their costs in complying with the auto-enrolment regime.
Footnotes
1 Fiscal eenheid PPG Holdings BV v. Inspecteur van de Belastingdienst (Case C-26/12)
2 Wheels Common Investment Fund Trustees Ltd and others v Commissioners for HMRC (Case C-424/11)
3 ATP Pension Service A/S (Case C-464/12)
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