The ruling has prompted HMRC to make significant changes to its policy on the recovery of VAT on pension scheme costs by employers. However, Martin Dane, Head of VAT and Indirect Taxes at DSH, has warned that the changes are complex and lacking in clarity.
“Historically, HMRC allowed an employer to recover the VAT incurred in the general management and administration of its employees pension scheme as a business overhead,” explained Martin.
“However, VAT incurred in relation to investment or asset management was not seen as recoverable by the employer. Where a single invoice related to both general management/administration and investment/asset management, HMRC allowed the employer to recover a flat 30% of the associated VAT.”
- The VAT on general administration/management costs will continue to be recoverable, provided that the employer commissions, receives, is invoiced for and pays for the services.
- Where the employer receives these services but passes the cost to the pension fund, whether by direct reimbursement or by set-off against contributions, the employer must account for output tax on the value of the costs passed on. If the pension fund is, itself, in business and VAT registered, the pension fund can recover the VAT.
- As before, the VAT on investment/asset management services is not recoverable by the employer.
- Where the employer receives a single service that covers general administration/management and investment/asset management, this may be treated in the same way as point 1 above and the VAT is potentially recoverable by the employer.
“The last point leaves huge scope for uncertainty and will, no doubt, lead to confrontations with HMRC,” said Martin.
“Employers can go some way towards protecting themselves by reviewing the precise nature of the services provided by pension professionals, the contractual terms with them and the narrative on invoices for these services.”
He added that HMRC said it would not seek to backdate the new rules to claw back VAT that was legitimately recovered under the former policy. It has also allowed a six-month transitional period during which employers may continue to use the 30% recovery.
It has also said that because the policy change could result in the recovery of more VAT than previously permitted under the former 30%/70% split, it will consider claims for the refund of the extra VAT.
To find out more about DSH Chartered Accountants & Business Advisors, visit www.dsh.co.uk or call 01622 690666.