HMRC tightens up VAT treatment of pension fund management costs
HM Revenue & Customs (HMRC) has announced a tightening up of its treatment of VAT deductions on pension fund management costs. This is in response to last July’s judgment of the Court of Justice of the European Union (CJEU) in the Dutch PPG Holdings BV case (see Pensions Bulletin 2013/32). The change is effective from 3 February 2014 with an optional six month transitional period.
HMRC allows an employer to deduct from the VAT charged on its supplies the VAT it incurs in relation to the general management costs of running a pension scheme. By contrast, investment management costs are considered as relating solely to the activities of the pension fund and are not VAT deductible by the employer.
However, where a single invoice is received by the trustees covering both the general management of the pension scheme and the management of the scheme’s investments, HMRC’s practice has been to allow the employer to claim 30% of the VAT as relating to the general management of the scheme and for the pension fund to claim 70% as relating to the investment management. In reality this 70% can often not be reclaimed as the trustees are not in the business of making VATable supplies.
In the light of the CJEU judgment HMRC has now withdrawn the 70/30 treatment with immediate effect (although for six months the pension scheme and the employer can continue to agree a 70/30 split where the trustees are invoiced for services covering both headings). HMRC is now reiterating that in order for an employer to deduct VAT from the VAT charged on its own supplies it must establish a direct and immediate link between the supply received and the supplies made. This means that:
- General management costs – of running a scheme are likely to be VAT deductible by the employer, but only if the supplies are made directly to the employer. And if the pension scheme bears the cost of such services (whether by reimbursement or a set off against pension contributions) the deduction will need to be cancelled out by being passed to the trustees for them to deduct to the extent that they make VATable supplies
- Investment management costs – will generally not be VAT deductible by the employer since (HMRC argues) the costs of operating an investment have a direct and immediate link to the investment itself which “cannot therefore be general costs of the employer”. The one exception is where the services received “go further than the management of the investments”. In this case, so long as the supply is received by the employer the VAT incurred will potentially be deductible
HMRC will accept retrospective claims for overpaid VAT over the last four years where the invoices were received by the employer (not the trustees) and the new criteria are met. Where part of the VAT has already been deducted by the employer through the 70/30 rule in the past, care is needed with regards to any VAT already claimed by the pension scheme.
HMRC does not intend to seek repayment of any VAT where the employer has applied the 70/30 rule and the new criteria were not met.
Although it would appear that this policy change impacts all types of pension scheme, the HMRC Brief concludes, rather confusingly, by returning to the CJEU decision and saying that “whilst the liability of management services in respect of defined benefit pension schemes has now been determined by the CJEU, a judgment on the liability of management services in respect of defined contribution pension schemes is expected soon from the CJEU in the case of ATP Pension Service A/S” (see Pensions Bulletin 2013/53). HMRC warns that following the ATP judgment it will “take the appropriate steps to protect [its] position in relation to input tax claimed for the management of defined contribution pension schemes. This will include the issuing of assessments to recover any VAT deducted that was incorrectly charged”.
Comment
It seems clear that HMRC is using developments in EU VAT law to protect its revenue base, through arguably a narrow interpretation of the PPG judgment. If anything, its VAT receipts may increase as a result of its statement.
Although there is a period of grace for the 70/30 rule, this statement puts firmly back on the trustees’ and employer’s agenda how they go about commissioning, receiving and accounting for VATable supplies in relation to the operation of the pension scheme, as a result of which some changes may be necessary by suppliers in how they account and whom they invoice in order to protect (and possibly improve) the employer’s VAT position.
High Court backs PPF approach to failure scores
The High Court has overturned a hitherto rare challenge to the Pension Protection Fund’s interpretation of levy calculations by the Deputy PPF Ombudsman.
In February 2013, in a case concerning the West of England Ship Owners Insurance Services scheme, the Deputy PPF Ombudsman ordered the PPF to recalculate a risk-based levy, following an appeal against a D&B failure score (see Pensions Bulletin 2013/13). The case hinged on the failure by D&B Luxembourg to collect the publicly filed accounts of the sponsoring company (in Luxembourg) which were not sent to D&B Luxembourg directly. The Deputy PPF Ombudsman found that it was reasonable for the scheme trustees to assume that D&B would follow the same practice abroad as it would in the UK when accumulating the information necessary for it to calculate failure scores, and at the same time made further directions in respect of costs and interest payments accrued by the scheme trustees.
The PPF has, however, successfully appealed against that ruling, challenging both the Deputy Ombudsman's decision and her jurisdiction to make the directions set out in her decision. On a point of law, the High Court found that there was no scope in the levy determination for companies to challenge PPF levies based on failure scores provided in the ordinary course of D&B’s businesses, which were in turn calculated by D&B using correct, albeit out-of-date, information.
Comment
The High Court’s judgment not only confirms the PPF’s strict approach in applying discretions and reviewing appeals, but also sends a strong message regarding the power and jurisdiction of each of the bodies.
This is a timely reminder that trustees and companies, especially those with overseas sponsoring employers or guarantors, to check that information held by D&B is correct and up-to-date.
PPF levy – D&B insolvency risk measurement unchanged for 2014/15
We reported in December last year (see Pensions Bulletin 2013/51) that D&B planned to amend its scoring methodology from early in 2014 and this would impact two or three months’ insolvency risk scores for the 2014/15 levy season. D&B has last week confirmed that the scheduled implementation is delayed until late March to early April, and it can now be expected that the new scoring methodology is very unlikely to affect PPF levies for the 2014/15 levy year.
Comment
This should provide a level of relief as the PPF levies are no longer at the mercy of an unknown and untested algorithm. This is particularly relevant for participating employers with ultimate parent companies that may have “slightly greater than average risk” (insolvency score of between 11 and 50) as at 31 March 2014, as changes to the algorithm could potentially easily change a “lower risk” ultimate parent company to one with slightly higher than average risk, thus capping the participating employer’s scores.
Minor changes made to auto-enrolment quality requirements
Draft regulations have been laid before Parliament making minor changes to the quality requirements for auto-enrolment schemes.
The draft Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2014 make the following changes:
- An average salary scheme will no longer be disqualified from being used for auto-enrolment purposes if accrued benefits are revalued at less than a minimum rate, provided that both the scheme’s funding and statement of funding principles (or equivalent) assume that revaluation will be at or above the minimum rate (the minimum rate is the lesser of the increase in the RPI, CPI and 2.5% pa)
- The minimum rate is set for certain public sector schemes at a different rate to other schemes, allowing for an annual increase or decrease in line with a “relevant percentage” as specified in a Treasury Order
- It will become possible to certify a hybrid scheme where the money purchase element contains contribution rates no less than the required contributions under the phasing in of the money purchase “alternative requirements”
The draft regulations are expected to come into force on 1 April 2014.
Minor extension proposed in Financial Assistance Scheme eligibility
Draft regulations have been laid before Parliament that will correct a technical defect in the scope of the Financial Assistance Scheme (FAS) and through this enable a particular type of scheme that is currently ineligible for both the FAS and the Pension Protection Fund (PPF) to become eligible for the FAS.
The draft Financial Assistance Scheme (Qualifying Pension Scheme Amendments) Regulations 2014 extend the definition of a qualifying pension scheme to cover a defined benefit scheme if:
- It began to wind up on or after 23 December 2008 and before these regulations come into force
- It wound up underfunded due to an insolvency event which occurred before 6 April 2005
- There was not a qualifying insolvency event that could lead to PPF entry; and
- The relevant employer ceased to be an employer in relation to the scheme prior to 10 June 2011
Comment
These regulations appear to deliver precisely what the Department for Work and Pensions proposed in June 2011 (see Pensions Bulletin 2011/26). It is not clear why there has been such a delay in bringing this necessary change to the statute book.
How to reduce your PPF levy
The Pension Protection Fund (PPF) and the Confederation of British Industry have published guidance about how PPF levies work, setting out the actions that could be taken to reduce individual levy bills and the deadlines that must be met to make sure these actions are taken into account.
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.
