VAT on pension costs – HMRC now says that schemes can carry on as they were
HMRC has published its long-awaited guidance on the treatment of VAT on pension costs following the ECJ ruling in the PPG case, but it contains a surprise. In addition to all the options HMRC has been communicating since early 2014 that were to be potentially used in place of existing arrangements, schemes can now continue with the latter undisturbed. There has, as yet, been no wider announcement from HMRC about this important development.
The transitional period in which the existing VAT treatment could continue, which has been extended multiple times (see Pensions Bulletin 2016/36), now seems to end on 31 December 2017, but has lost its meaning.
The guidance, which can be found between pages VIT44600 and VIT45510 of HMRC’s VAT Input Tax internal manual makes clear that which option is available will depend on whether the employer does or does not contract and pay for the services used to run the pension scheme.
Where, as is typically the case, the employer does not directly contract and pay for services, it can continue to deduct VAT incurred in setting up the scheme and on its day-to-day administration. But, as now, the VAT incurred on investment services cannot be deducted. The guidance sets out lists of services that are considered to be for administration, those that are for investment and those which are attributed to both – these are identical to those set out in HMRC’s pre-PPG guidance last updated in December 2012. It also makes clear that where a single tax invoice for a single supply comprises a mixture of administration and investment services, the rule that 30% can be attributed to administration costs (and hence VAT deductible) continues to apply (the “30/70” rule).
At least in theory, employers will newly have the possibility of recovering the VAT incurred on investment services. They will need to have the services supplied to them; be a party to the contract for the services; and pay for them. This might be possible through one of three routes:
- a tripartite contract between the supplier, trustees and employer – but HMRC says that this route is only open to DB schemes;
- where the trustees contract with the employer to supply them with the service of running the pension scheme on their behalf (“onward supply”); or
- through the trustees (if set up as a company) VAT grouping with the employer.
However, as HMRC notes, there are difficulties with implementing these options, on which it expands in the guidance.
The guidance also points to existing HMRC guidance, where, following the ATP case, HMRC accepted that certain services supplied in relation to the pooled assets of DC occupational and personal pension schemes having certain attributes should be treated as being VAT exempt.
Comment
After years of telling pension schemes and their sponsors that they have to change the way that VAT is reclaimed, HMRC now quite casually turns round and says that the current methods can continue. Quite why they can, when it was apparently not possible until now, is not clear, but it is most welcome nevertheless. We suspect that many schemes and sponsors will now wish to quietly put all of the potential for change behind them and continue with their current arrangements. However, it is possible that going forwards there will be greater scrutiny by HMRC of the split between investment and administration costs, so schemes may wish to take this opportunity to review their approach to reclaiming VAT and ensure it is in line with this latest guidance.
Government decides not to issue “End of contracting out” statements to individuals
In a significant about-turn, HMRC has decided that it will not be issuing pension statements to all individuals under State Pension Age detailing their contracted out rights. This had been intended to be the last step in the protracted GMP reconciliation exercises that have been underway since salary-related contracting-out ended on 5 April 2016.
The announcement is contained within Countdown Bulletin 30. The stated reason for the about-turn is that there are or will be other ways in which individuals can find out about their contracted out rights. The State Pension Forecast service is mentioned as is the Pension Tracing Service and it is hoped that many pension schemes will participate in the Pensions Dashboard project which is planned to be available from 2019.
The Countdown Bulletin also sets down revised timelines for the scheme reconciliation service. Although there is no change to the 31 October 2018 deadline for schemes to raise queries with HMRC, HMRC will now not rush to work through the final queries by the end of 2018, instead extending their timescale to early 2019 before issuing a final membership scan to schemes in March 2019.
Comment
It was never made clear what these pension statements would contain, but the intention was that they would assist individuals in understanding what their contracted out rights were and where they were held. This was clearly going to be a huge task whose success would be dependent on HMRC holding accurate contracting-out data relating to the correct schemes along with the small matter of up-to-date addresses for millions of people. The abandonment of this costly and likely ineffective exercise is the right decision. But what HMRC needs to do next is ensure that it beefs up the resources it makes available for GMP reconciliation and show some further flexibility on its deadlines, especially those which stop schemes from interacting with HMRC.
NEST to be opened up to all contractually enrolled employees
The DWP is consulting on regulations to deliver its promise of allowing employers to contractually enrol workers into the National Employment Savings Trust (see Pensions Bulletin 2017/10). This will allow the NEST Trustee to accept workers who have been contractually enrolled after their employers’ staging date.
Currently NEST’s rules only allow workers who have been contractually enrolled or have joined by another form of consent to join NEST before their employers’ staging date. As staging will shortly end in February 2018, this will mean that most existing employers cannot use contractual enrolment to enrol new workers into NEST. The regulations are intended to remove this barrier for employers who want to choose NEST for their entire workforce.
The regulations also contain some minor and technical changes which:
- Clarify that individuals may join NEST in the event of a “bulk transfer with consent” and require that any amount transferred in as a result (and more generally other sums) must be applied to a member’s account where the individual has already been admitted as a member
- Give the NEST Corporation the ability to close members’ pension accounts where they have been open for longer than 12 months and have never received contributions. NEST will have to write to members before closing any empty accounts. If the member starts contributing within a period to be specified NEST will take no further action
- Require the NEST Corporation to carry out research with scheme members and participating employers and their representatives, in connection with the operation, development or amendment of the scheme. This is in order that NEST can demonstrate it meets the requirements of the EU’s General Data Protection Regulation requirements on lawful data processing when carrying out research
The consultation lasts less than three weeks, closing on 20 November 2017, and the intention is that these changes will come into force on 1 April 2018.
Comment
This seems a straightforward and sensible move. Presumably the Government believes it will be non-controversial as it is only giving interested parties a very short time to respond.
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.
