VAT on pension costs – another year to prepare but employers may need it
It is now over two years since the European Court of Justice ruled against the Dutch tax authorities on the VAT treatment of investment costs in the PPG case and we are no nearer to a solution for UK employers on the VAT treatment of pension costs. In the latest instalment HMRC has issued its long-promised Revenue and Customs Brief 17/15.
Of most immediate interest in this Brief is the announcement that the transitional period in which the existing VAT treatment may be used is extended by a year to 31 December 2016. HMRC states that taxpayers may switch to the new treatment during this period and that from 1 January 2017 the new VAT treatment must be applied.
The Brief also communicates some of HMRC’s latest thinking on ways in which the new VAT regime may operate. Three possibilities are discussed:
- Tripartite contracts – HMRC’s position remains as set out previously (see Pensions Bulletin 2015/15). A further difficulty is highlighted which is that for asset management costs if the employer can get a VAT deduction because this service is directly provided to it, HMRC’s view is that corporation tax relief will not be available. This may make the employer’s overall tax position worse than if a tripartite contract for these services had never been set up
- “Onward supply” – this would involve the trustees registering for VAT themselves and then supplying the scheme services to the employer, although the extent to which the employer would obtain a deduction on asset management costs in this scenario remains unclear
- VAT grouping – this would involve the trustees (who would probably have to be in a corporate form for this to work) joining the employer’s VAT group. Again, there is some doubt as to the extent that a deduction could be obtained for asset management costs. A more difficult hurdle to overcome has been that a condition for VAT grouping is that all of the entities within the group become jointly and severally liable for each other’s VAT bills. HMRC may have made this easier by stating that it is of the view that it could not go after pension scheme assets when chasing VAT owed by the employer
HMRC is still considering representations being made recently, particularly about the corporation tax issue. We are promised “further guidance this year”.
Comment
We would have had a crisis on our hands had the extension to the deadline not been granted, involving the re-writing of potentially tens of thousands of contracts between pension schemes and their service providers. We are thankful that this has been averted.
Pension scheme sponsors should nevertheless now proceed to take their own tax/legal advice on how to adapt to the new VAT environment, otherwise they face the possibility of paying VAT on services that they have hitherto obtained a deduction on and/or not getting optimal VAT treatment on asset management costs.
It is becoming apparent that there will not be a one size fits all option. Of the three potential solutions mentioned above each have their pros and cons. Employers and trustees now have another year to explore which is best for them, but given the technical complexity and the practicalities of re-jigging existing arrangements, it would be best to start evaluating the options now if we are not to be worrying about a crisis this time next year.
Government moves to ban member-borne commission payments
The Department for Work and Pensions has launched a consultation to seek views on the most effective means of regulating to prevent charges being imposed on members of occupational pension schemes used for automatic enrolment to recover the cost of commission paid to an adviser.
This consultation has been expected since the Government announced in March 2014 that its intention was to prohibit member-borne commission payments to an adviser in those schemes from April 2016 (see Pensions Bulletin 2014/44). The FCA’s parallel rules in relation to workplace personal pension schemes used for automatic enrolment banned “consultancy charges” in these schemes from April 2015 and will ban commission payments from April 2016.
The consultation paper sets out four key principles to achieve the ban – namely:
- It is only applicable to occupational pension schemes that provide money purchase benefits and are used for automatic enrolment – and will apply to all arrangements within such a scheme, not just the default arrangement (for example, a DB scheme used for automatic enrolment and which provides money purchase AVCs would be included)
- It will not prevent scheme members from choosing to pay for advice or services provided by an adviser if they wish to do this. However, members must not be required to pay for advice as a condition of joining or remaining a member of the scheme, or pay for advice which the service provider is already legally obliged or contractually committed to provide. The cost of advice must also be clearly set out
- It will not prevent employers from accessing advice provided by an adviser where they pay for these services themselves
- It will not prevent trustees from accessing advice or services provided by an adviser. In particular, trustees would be able to continue to use member-borne charges to pay for advice that they need or are required under law to obtain to run their schemes effectively
Two main options are proposed to prevent charging:
- Placing a duty on trustees to ensure that members are not charged for the cost of any commission payments to advisers in relation to any new commission arrangements; and to use their best endeavours to remove any such existing member-borne commission arrangements in these schemes; and
- Placing a duty on service providers to prevent members being charged for the cost of commission payments to advisers in relation to any new commission arrangements; and to remove any such existing member-borne commission arrangements in these schemes
Under both options, the Pensions Regulator would be responsible for compliance, and the trustees would be required to provide the Regulator with relevant information.
The commission ban will affect the following members:
- Any current employee of a given employer who has at least one employee using that scheme as a qualifying scheme for automatic enrolment; and
- Any former employees of that employer who made a contribution to that scheme before the date the ban comes into effect, including employees who were not automatically enrolled into the scheme by that employer
Consultation closes on 27 November 2015. The DWP will then:
- Make regulations to ban new member-borne commission arrangements from 6 April 2016 (or the employer’s staging date if later); and
- Consult on draft regulations to implement a ban on member-borne commission arrangements entered into before 6 April 2016, later in 2016
Comment
There could be plenty for affected trustees to do once the regulations are in place. They will need to go through a process to obtain the correct information from service providers, and if the first option is used, to negotiate new products to remove commissions, and possibly change providers to comply with the requirements, all before 6 April 2016. Further negotiations may also be necessary later in 2016 in respect of existing products. Fortunately the DWP has considered the possibility that changing service providers or products may not be in the members’ best interest; it will be interesting to see what the Regulator will do in these cases.
MPs seek to check public understanding of the new State Pension
Concerned that many of those who will be affected by the change to the State Pension do not know enough about it or exactly what it will mean for their pensions, the House of Commons Work and Pensions Committee has launched a new inquiry into the matter.
The Committee’s focus is on the nature, scope and effectiveness of the campaign currently being run by the Department for Work and Pensions to make everyone aware of the new State Pension coming into being next April. However, amongst its questions it asks:
- How could workplace pensions be used to signpost people to information about their State Pension?
- Should employers of those in contracted-out pension schemes be providing their employees with written information about the state pension reforms when contracting out ends in April 2016?
Comment
All this is rather late in the day. By the time the MPs present their findings we are likely to be within three months of the go-live date. And as to the matter of asking workplace pension schemes and sponsoring employers to provide information, there has never been a requirement in relation to the existing State pension system, in all its guises, so it does seem inappropriate to ask for one now. Nevertheless, many contracted-out schemes may choose to provide at least links to some of the materials being produced by the DWP, as part of communicating the impact of the end of contracting out to their active membership.
Fears of an early announcement on the future of pension tax relief recede
Although the consultation on the future of pension tax relief (see Pensions Bulletin 2015/30) only closed on 30 September, there has been speculation in recent weeks that the Chancellor would use the 25 November Autumn Statement to set out the Government’s intended direction of travel.
This possibility now seems to have receded. First there were press reports whose source appeared to emanate from No. 11, backed up by comments from the pensions minister. And this Tuesday the Chancellor said in the House of Commons that “we are open to consultation on the pensions taxation system at the moment. It is a completely open consultation and a genuine Green Paper, and we are receiving a lot of interesting suggestions on potential reform. We will respond to that consultation fully in the Budget”.
Comment
The outcome of the consultation could well be a real revolution in UK pension provision – but the likelihood of an announcement of major changes in the 25 November Autumn Statement appears to have receded.
If major changes are announced in the Spring Budget, one would hope proper implementation time will be given before they commence. The downside of that would of course be having to live for some time with the tapered Annual Allowance and the reduced Lifetime Allowance that are due to come into force from 6 April 2016, as well as any later changes.
HMRC’s Newsletter 73 gives some more details on 2016 Lifetime Allowance protections
As promised in September (see Pensions Bulletin 2015/42), HMRC’s latest newsletter contains some more administrative details about the forthcoming Fixed Protection 2016 and Individual Protection 2016 associated with the lifetime allowance reducing to £1m from 6 April 2016.
There will be no specific deadlines for applying for the protections but “individuals will need to apply for protection before they take their benefits as they will need the HMRC reference number if they want to rely on the protection” (no certificates will be issued for this protection).
Such individuals will be able to apply and obtain the reference number using an online self-service facility from July 2016. If they don’t have such a reference number (and no other protection) the scheme setting up the benefit payment will certify the percentage of the lifetime allowance used up relative to a £1m measure. Individuals who wish to start taking benefits between April 2016 and July 2016 using a protection can write to HMRC as part of an interim process; a full application will then be required once the online self-service becomes available.
HMRC is also planning to set up an online service for scheme administrators to check the protection status of their scheme members – details on this (still being explored) will follow “in due course”.
Comment
We note that even if registration is delayed, the protected lifetime allowance would be expected to have retrospective effect to 6 April 2016 – a potential for some real confusion and error.
We are pleased that HMRC has set up a process for individuals planning to take benefits between April and July 2016 – but it gives a flavour of the practical difficulties: members need to plan ahead to make a written interim application so as to get an HMRC response in time to present HMRC’s reply to the scheme’s administrator before benefits are taken; and then remember to make a full online application after they start drawing their benefits.
And it must not be forgotten (with all this talk of delay) that 5 April 2016 does remain a key date for an individual to opt out of pension “accrual” if wanting to be able to rely on Fixed Protection 2016.
The draft legislation due in December will we hope confirm the fine detail of the law – including whether there are new obligations for scheme administrators on this.
The newsletter also covers several other topics including:
- Details on what tax a scheme should deduct when paying out a lump sum death benefit on or after 6 April 2016 if it is a lump sum attracting tax at the recipient’s income tax rate (ie typically if the member dies age 75+); and
- A request for schemes to issue a reminder that individuals must declare to HMRC if they have exceeded the 2014/15 annual allowance on their Self-Assessment tax return, which has a deadline of 31 October 2015 for paper returns
Pension tax adjustments for Scottish taxpayers – regulations now made
The Scottish Rate of Income Tax (Consequential Amendments) Order 2015, which deals with consequential changes to tax law to allow for potential differences between the Scottish and UK basic, higher and additional rates of income tax, has now been made. This is identical to the draft regulations published in June (see Pensions Bulletin 2015/28).
A new page has been set up on the GOV.UK website on the Scottish rate of Income Tax and a technical guide has been issued on who is a Scottish taxpayer.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
