UK: Pension Investment Management Services - With Or Without VAT?

Last Updated: 26 August 2015
Article by Elmer Doonan, Jay Doraisamy and Rebecca McKay

A significant cost of running a defined benefit pension scheme historically has been the VAT on investment management services. However, HMRC has recently confirmed that a European court case means employers may now recover VAT on these services. What steps should be taken to ensure maximum recovery?

When can VAT be recovered?

HMRC's old position

HMRC has historically taken the view that VAT on administration services could be recovered, but that VAT on investment management services could not. It also accepted that most invoices were likely to include a mix of these two elements and therefore allowed VAT recovery on the basis of a 70/30 split with VAT recoverable on 30% of each invoice.

HMRC's new position

A European court case (Fiscale Eenheid PPF Holdings BV cs te Hoogezand (Case C26/12) (PPG) decided that VAT on pension scheme management charges can be recovered by employers provided there is a direct and immediate link between the services and the employer's economic activities as a whole.

Following PPG, HMRC issued Revenue and Customs Brief 43 (2014) and Revenue and Customs Brief 8 (2015). These documents revoked the 70/30 rule (with transitional protection – see below) replacing it with a general ability for employers to reclaim VAT on investment management services where:

  • there is contemporaneous evidence that the services are provided to the employer; and
  • the employer is a party to the contract for those services and has paid for them.

This means most sponsoring employers of defined benefit pension schemes will be able to reclaim VAT on fees charged for managing the investments of their pension schemes.

What do you need to do?

For Investment Management Agreements the transitional protections for the 70/30 rule expire at the end of December 2015. After this date, if a scheme's expenses do not meet the new test the effect of the PPG ruling will be to increase the VAT payable.

It is therefore vital that defined benefit pension schemes enter into new tripartite investment agreements which include the scheme employer as a party by this date. This is going to be more difficult than it sounds. HMRC has indicated that it will not accept the employer simply being added as a party to an existing agreement. Instead the entire balance of power in the agreement will need to be shifted towards the employer, (for example, the agreement will need to avoid any implication that the trustees will be on the hook to pay for the services except where an employer defaults).

In addition, the employer must have certain rights under the agreement, including the ability to take legal action in the event of a breach of contract, the right to investment performance reports and the right to terminate (albeit subject to trustee consent).

How can Dentons help reduce your VAT bill?

 For a fixed fee, we can help reduce your VAT bill by:

  • reviewing your existing defined benefit pension scheme investment documentation; and
  • advising on the changes that must be made so that the documentation meets HMRC's requirements for VAT recovery.

What about defined contribution schemes and other costs?

Defined contribution pension schemes will generally be VAT-exempt in respect of investment costs. Schemes should look to claim back any VAT that they have paid as quickly as possible as HMRC limits VAT repayment to the period of 4 years prior to the end of the period for which the claim is made. Any claim needs to be final and include all relevant calculations.

PPG covered a lot more than investment management agreements. HMRC has indicated that it is considering how VAT on other scheme costs should be dealt with and will update its guidance in the summer. This will include VAT on legal costs and the position where a corporate trustee is part of the sponsoring employer's VAT group registration.

Next steps

Whether you are an employer or trustee of a defined benefit scheme, we are happy to discuss your circumstances on a no fee basis over a 30-minute consultation in order to prepare an initial view of the changes required to the scheme investment documentation.

Following that, if agreed with you, we would prepare a report on the steps Dentons recommends in order for the employer to be in a position to reclaim VAT.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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