Employers will be hoping to benefit from VAT rebates on scheme services following HM Revenue and Customs’ latest guidance note, but pension lawyers have said further detail is needed on how to recover the tax.
HMRC has initiated changes to VAT rules across the spheres of administration, investment, legal provision and consultancy. The tax is now recoverable providing employers are both a party to the services contract and have paid for them.
The latest briefing note from HMRC, released in March, clarified the new requirements for sponsors wishing to deduct VAT paid on investment management services provided to defined benefit schemes.
Changing the rules
In the wake of the PPG judgment at the Court of Justice of the European Union in July 2013, HMRC ruled that in order for employers to recover VAT on services provided by third parties they must have contracts in place with providers and pay for services directly.
Further guidance is expected from HMRC over the course of the summer of 2015 on the outstanding questions for pension scheme employers and trustees.
This include VAT recoverability on other types of service (such as legal, actuarial and accounting services) and other types of scheme (such as defined contribution and hybrid), as well as the VAT position of groups that include a corporate trustee and the sponsoring employer.
The latest briefing note from HMRC, released in March, clarified the new requirements for sponsors wishing to deduct VAT paid on investment management services provided to defined benefit schemes.
A potential 20 per cent rebate on scheme services expenditure will be welcomed by sponsors faced with increasing pension costs.
Tax advantage?
HMRC stated it “accepts that tripartite contracts can be used to demonstrate that the employer is the recipient of a supply of DB pension fund management services”.
Chantal Thompson, partner at law firm Baker and McKenzie, said tripartite agreements were complex arrangements that would require significant attention between the provider, the employer and trustees involved in existing contracts.
“From January 1 2016 the only way in which the VAT can be recovered on investment management fees will be if there is a tripartite agreement in place and the employer pays the fees,” said Thompson.
She added: “I haven’t yet seen a tripartite agreement come across my desk; three parties are involved and there are tensions that do make it more complex.”
But Helen Powell, counsel at law firm Allen and Overy, said employers drawing up tripartite agreements with scheme stakeholders to recover VAT would lose the ability to deduct pension scheme costs from company profits for corporate tax purposes.
Section 200 of The Finance Act 2004 stipulates that employers can only offset the cost of providing scheme benefits where the costs relate to actual contributions and not the broader costs associated with managing a scheme.
However, under a tripartite agreement, service costs paid by the employer would not be contributions to the scheme and therefore would not be deductible against profits for corporate tax purposes.
“That leaves you with a choice,” Powell said.
“The rate of corporation tax is 20 per cent and the rate of VAT [the employer] would be recovering is 20 per cent. It may well be the case that the advantage is cancelled out… you lose the ability to deduct that amount from profits, the employer ends up no better off.”
It may well be the case that the advantage is cancelled out… you lose the ability to deduct that amount from profits, the employer ends up no better off
Helen Powell, Allen and Overy
Further guidance is expected from HMRC over the course of the summer on the outstanding questions for scheme employers and trustees.
Investment services
Under the new VAT rules employers wishing to reclaim VAT on fund management services will need to draw up tripartite agreements with investment managers running scheme assets.
Clifford Sims, partner at law firm Squire Patton Boggs, questioned how ready investment managers are to draw up these more complex agreements with clients.
“You’d be lucky to find anything in a typical investment manager’s agreement which says even that information has to be disclosed to the employer about how the manager is performing, let alone contractual rights to receive reports or to terminate the manager,” said Sims.
“The detail of these arrangements needs time to work though, to work out what is a fair approach but also what is substantive."
However Jorge Morley-Smith, director of tax at the Investment Association, said its members had been approached by clients requesting the replacement of pre-existing contracts with tripartite agreements.
“How advanced those [negotiations] are is difficult to say. We’re working on our own model investment management agreement and our hope is that it will be compliant with HMRC’s guidelines,” he said.
