Purpose of this brief

This brief follows on from Revenue and Customs Brief 43 (2014) which set out the position of HM Revenue and Customs (HMRC) following the decision of the Court of Justice of the European Union (CJEU) in C-26/12 Fiscale Eenheid PPG Holdings BV cs te Hoogezand (PPG). That case concerned an employer’s entitlement to deduct VAT paid on pension fund management services (ie the administration of the pension and the management of the assets of a fund) in relation to defined benefit (DB) pension schemes.

You can read the full text of the CJEU’s decision in PPG on the CURIA website.

This brief has been drafted following informal consultation with the pensions industry (including pension lawyers, managers and trustees) and outlines evidence that HMRC accepts meets the requirements outlined in the previous brief in order for employers offering DB pension schemes to achieve VAT deduction in respect of the costs of pension fund management services; in particular it considers the use of tripartite contracts.

This brief only relates to pension fund management services provided in respect of DB schemes. In specific circumstances pension fund management services supplied in respect of defined contribution pension schemes will be VAT exempt following the CJEU decision in C-464/12 ATP Pension Services. Further information on this can be found in Revenue and Customs Brief 44 (2014).

HMRC has received enquiries in respect of the impact of the PPG decision on VAT recoverability relating to:

• other types of service (such as legal, actuarial and accounting services)
• other types of pension scheme (such as defined contribution and hybrid)
• VAT Groups that include a corporate trustee and a sponsoring employer
• trustees that charge employers to run their pension schemes

HMRC has been discussing these matters with interested parties and intends to provide further guidance in the summer.

Readership

This brief is aimed at:

• employers that provide DB pension schemes for their employees
• the providers of pension fund management services
• pension scheme trustees
• tax advisers

Background

Details of the PPG decision can be found in Revenue and Customs Brief 43 (2014). That brief also outlines the VAT treatment that applied prior to the PPG decision, the way that VAT treatment has changed as a result of the decision and the transitional arrangements that are currently in place.

In the case of funded DB pension schemes, which must be established under a trust, scheme trustees typically contract with third party service providers for the provision of pension fund management services. However, because benefits arising from DB pension schemes often form a central part of the sponsoring employer’s staff remuneration package and the employer carries the ultimate burden of ensuring that there are sufficient funds with which to pay the promised benefits, all such services benefit the sponsoring employer as well as the pension scheme. This gives rise to the unique nature of DB pension provision and is a key factor in determining the recipient of the services supplied.

HMRC accepts, therefore, that for DB pension schemes there are normally 2 potential recipients of the supplies: the employer and the pension scheme through its trustees. Determining which party is the recipient of a supply of services is a fact sensitive question that will depend upon the circumstances in which the transaction took place. In particular, it is necessary to consider the economic reality of the arrangements and, whilst there are a number of factors to be taken into account, the most useful starting point for this is to examine the agreements between the parties.

Following the PPG decision, the factors to consider in order to determine the recipient of supplies (and therefore the party with the right to deduct) are outlined in detail in Revenue and Customs Brief 43 (2014). In particular, that brief makes it clear that it is necessary for the employer to both contract and pay for the services in order for it to be the recipient of the services for VAT purposes.

Tripartite contracts

Since the publication of the Revenue and Customs Brief, some employers have expressed a concern that directly contracting for pension fund management services may sometimes be difficult owing to the regulatory context in which they operate. Accordingly they have asked whether HMRC will accept that tripartite contracts between the supplier, pension scheme trustees and employer meet the condition that the employer must contract for the services.

HMRC has considered the use of tripartite contracts specifically in the context of DBpension schemes where the regulatory regime requires the scheme to be established under a trust and it is the employer that ultimately bears the financial risks and benefits associated with the performance of the scheme.

Given the unique nature of these DB pension arrangements HMRC accepts that tripartite contracts can be used to demonstrate that the employer is the recipient of a supply of DB pension fund management services. An employer may therefore be able to deduct VAT incurred on these services in line with its residual recovery position where, as a minimum, the contract with the service provider evidences that:

• the service provider makes its supplies to the employer (albeit that the contract may recognise that, in the particular regulatory context in which DB schemes operate, the service provider may be appointed by, or on behalf of, the pension scheme trustees)
• the employer directly pays for the services that are supplied under the contract
• the service provider will pursue the employer for payment and only in circumstances where the employer is unlikely to pay (for example, because it has gone into administration) will it recover its fees from the scheme’s funds or the pension scheme trustees
• both the employer and the pension scheme trustees are entitled to seek legal redress in the event of breach of contract, albeit that the liability of the service provider need not be any greater than if the contract were with the pension scheme trustees alone and any restitution, indemnity or settlement payments for which the service provider becomes liable may be payable in whole to the pension scheme trustees for the benefit of the pension scheme (for example in circumstance where the scheme is not fully funded)
• 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)
• 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 (this can be in addition to any right that the pension scheme trustees may have to terminate the contract unilaterally)

In addition to the above, evidence that the pension scheme trustees agree that it is the employer who is entitled to deduct any VAT incurred on the services will reduce the potential for disputes.

Paying and recharging of costs

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 fund or any payment that is made by, or through, the fund constitutes payment by the employer.

If an employer recharges the net cost of those services to the pension scheme, that recharge is consideration for an onward taxable supply and VAT is due accordingly. This amount is potentially deductible by the pension scheme to the extent that the pension scheme is engaged in taxable business activities.

Pension scheme trustees and employers will normally regularly review the level of contributions required by the employer into its pension fund/s to ensure those funds are able to meet the forecast pension benefit commitments. HMRC accept that if adjustments are made to these contributions, to take account of the fact that it is the employer rather than the fund that is paying for certain costs, that does not constitute consideration for a supply by the employer to the pension fund. This is provided that there is no specific reduction equal to the actual costs that were incurred in any given period.

Transitional period

The transitional period announced in Revenue and Customs Brief 43 (2014) will continue until 31 December 2015. In the meantime, businesses may continue to use the VAT treatment outlined in VAT Notice 700/17: Funded Pension Schemes should they choose, provided that both employer and pension scheme trustees agree the same treatment.

Source: HMRC. www.hmrc.gov.uk. Copyright Acknowledged.