VAT on pension scheme costs – less than nine months to prepare for the changes
Pensions scheme sponsors should start to prepare for the new VAT environment for pension scheme costs.
This is the main lesson to draw from Revenue and Customs Brief 8(2015) which contains the latest thoughts of HM Revenue & Customs (HMRC) on the VAT treatment of defined benefit pension scheme management costs.
This follows on from the last updates published in November (see our News Alert on this for background) and is a clear pointer on where HMRC’s thinking is leading. To obtain a VAT deduction after the end of this year on scheme management costs, employers who sponsor DB schemes will most likely have to enter into “tripartite contracts” with the scheme trustees and their service providers.
The latest brief applies to “pension fund management services” which appears to mean the administration and investment services which were the subject of the PPG case (see Pensions Bulletin 2013/32). HMRC states that it will be providing further guidance in the summer about the VAT treatment of actuarial, legal and accountancy bills. HMRC sets out requirements for a tripartite contract to enable sponsors to obtain VAT deductions on the relevant DB scheme costs. These are that, as well as meeting the conditions stipulated last November, a tripartite contract’s terms must provide that:
- The service provider must make its supplies to the employer
- The employer must directly pay for the services supplied
- The service provider will pursue the employer for payment and only in some very narrow circumstances (such as the employer going into administration) will it recover its fees from the scheme
- Both the employer and the pension scheme trustees are entitled to seek legal redress in the event of breach of contract
- The service provider will provide fund performance reports to the employer on request (subject to the pension scheme trustees being able to stipulate that reports are withheld, for example where there could be a conflict of interest); and
- The employer is entitled to terminate the contract, although that may be subject to a condition that they should not do so without the pension scheme trustees prior written consent
HMRC takes a hard line on re-charging and states that for an employer to be able to deduct any VAT, it will be necessary for them to be issued with a valid VAT invoice for the full cost of the supply and to pay the service provider directly for the full cost of the services. HMRC does not accept that an equivalent increase in contributions to the scheme constitutes payment by the employer.
HMRC also confirms that the current VAT treatment may continue to apply until 31 December 2015.
Comment
Employers will need to obtain specialist tax advice in good time before the end of the year to optimise their VAT position going forward.
Pension scheme trustees should be prepared for approaches from their scheme sponsor to make changes to accommodate the employer’s tax position. Moving to tripartite contracts may have wide implications which trustees will need to consider carefully before agreeing.
Insolvency Service new guidance on dealing with bankrupts and pensions not yet in payment
The Insolvency Service has summarised its guidance to official receivers and debt relief order (DRO) intermediaries explaining how they should deal with undrawn pension entitlements following the judgment in Horton v Henry (see Pensions Bulletin 2015/02).
The guidance indicates, amongst other matters, that:
- Official receivers must not include an undrawn pension fund in any calculation for an Income Payments Order/Agreement - only pensions which are in payment at the date of the bankruptcy order may be considered in this calculation. The official receiver may not influence the bankrupt individual in making the election
- Similarly, intermediaries in DRO proceedings should not consider an undrawn pension fund, which might be drawn as the debtor is 55 or over, in the calculation of income. Only funds which are in payment as income should be included when considering surplus income
- However, where the debtor is over 55 and has access to an undrawn personal pension fund it should be confirmed that at the date of the bankruptcy application or petition the debtor really is unable to meet their debts
- The Insolvency Service goes on to say that official receivers should continue to challenge payments made into a pension scheme where such payments were to the detriment of creditors, particularly where the bankrupt holds a self-invested personal pension (SIPP) and the main asset of the SIPP is property
Comment
This guidance is intended to remove some of the uncertainty surrounding bankrupts and pension funds. However, we understand that the appeal of Horton v Henry is likely to be heard in the early summer, so this may yet not be the final word on the matter.
Newspapers raise concerns about both pension data and charges to access funds
The Information Commissioner’s Office has launched an investigation after a Daily Mail report raised concerns that the pension and other financial details of many individuals has been sold to cold-calling and “spam text” companies. The fear is that this data could be used to target individuals with scams following the pension reforms coming into effect on Monday 6 April.
Comment
There has been widespread concern expressed for some time about whether people will be drawn to the charms of scammers rather than heeding the proper advice on the new pension freedoms afforded to them. These concerns will only be amplified by these stories of the ease with which the scammers can cheaply obtain personal details.
Royal Assent for the first Finance Bill of 2015
The Finance Act 2015 achieved Royal Assent on Thursday 26 March as the Government squeezed in all that was necessary before the election campaign got under way this week. It includes the legislation to implement the last elements of the current overhauls to changes in “death tax” payable on unused money purchase pension pots (see Pensions Bulletin 2014/50).
Comment
The Government deferred a number of other non-pension measures previously announced for Finance Bill 2015 to a future Finance Bill, in recognition of the accelerated Parliamentary process applying to the Act was subject to, whilst including a number of priority measures announced at Budget 2015.
After the election we expect (at least) one more Finance Act this year. What pensions tax measures are included in that will depend on the composition of the post-election Government– but it should include, at least, the 2016 reduction in lifetime allowance to £1m announced in last month’s Budget (and associated protections - see Pensions Bulletin 2015/12).
FCA looks to improve the annuity and retirement income market
The Financial Conduct Authority (FCA) has published its final report on its study into the retirement income market. It confirms the findings of the interim report (see Pensions Bulletin 2014/52) that the market in annuity and income drawdown products is not competitive enough, with the consumer losing out as a consequence.
In the summer, the FCA will be carrying out consumer trials to help identify the best way to inform their retirement income decisions, and will be working with the industry and Government to look to improve annuity comparisons and replace the “wake-up” packs, as well as to develop a “Pensions Dashboard” in the longer term.
Following the FCA’s report, the Financial Services Consumer Panel argued that the remedies proposed do not go far enough, and that urgent action is needed to protect the interests of people who buy their retirement products through the growing “non-advice” sales market. The Panel has called upon the FCA to adopt rules and mandatory standards which guarantee high professional standards, the transparent disclosure of charges, and a clear explanation of the implications of non-advice for consumer protection.
HMRC consults on draft regulations to make further minor changes from 6 April
HM Revenue & Customs (HMRC) has published three sets of draft regulations that will retrospectively introduce minor changes to the rules governing registered pension schemes from 6 April 2015.
The Registered Pension Schemes (Transfer of Sums and Assets) (Amendment No.2) Regulations 2015 will make a number of changes to cater for the new types of death benefits in the form of nominees’ and successors’ annuities, where these annuities are transferred from one insurer to another. To protect against complexity and unintended manipulation the draft regulations provide that nominees’ and successors’ annuities may only be transferred respectively to nominees’ or successors’ annuities issued by a different insurer. This will ensure that these annuities are treated in the same way as current dependants’ short term annuities as well as nominees’ and successors’ short term annuities (which can be provided from 6 April 2015).
The Registered Pension Schemes (Provision of Information) (Amendment No. 2) Regulations 2015 will amend the Provision of Information Regulations to require scheme administrators to tell beneficiaries where the payment of an annuity is subject to the lifetime allowance charge. They also require that, when beneficiaries annuities are transferred between insurance companies, the transferring insurance company must provide certain information to the receiving insurance company so that the correct tax treatment can be applied following the transfer.
The Registered Pension Schemes (Audited Accounts) (Specified Persons) (Amendment) Regulations 2015 will amend who can audit the accounts of registered pension schemes. Previously under tax and Department for Work and Pensions (DWP) regulations, a sponsoring employer of a scheme was prevented from being an auditor. DWP regulations were amended last year (see Pensions Bulletin 2014/10) to provide an exemption for very large trust-based multi-employer schemes with 500 or more employers. The Auditor Regulations make similar changes to the tax legislation.
Comments on the drafts should be submitted by 29 May 2015.
Public service pension schemes code comes into force
The Pensions Regulator’s code of practice on the governance and administration of public service pension schemes came into effect yesterday (1 April 2015).
Code of Practice 14, which was published in draft form back in January (see Pensions Bulletin 2015/03), is intended to help public service pension schemes meet governance and administration legal requirements.
The Pensions Act 2004 (Code of Practice) (Governance and Administration of Public Service Pension Schemes) Appointed Day Order 2015 (SI 2015/456) confirmed that the new code would come into force from 1 April 2015.
Box Clever fight carries on for another round
We report on this because the Pensions Regulator’s powers to issue a “financial support direction” are being challenged (see Pensions Bulletin 2014/04 for the previous instalment) and the eventual outcome may be important for employers who might potentially be targeted by the Pensions Regulator.
The Court of Appeal has now upheld an appeal by the ITV companies, the target of the financial support direction, against last year’s Upper Tribunal ruling on the grounds that the Regulator introduced new matters which were not in the original warning notice. The case now goes back to the Upper Tribunal.
Comment
The continuing legal process in this case demonstrates how a recipient of a financial support direction can resist it for a long time.
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.
