HMRC abandons VAT policy on insurer exemption

HM Revenue & Customs has adapted its policy on the value added tax treatment of pension fund management conducted by insurers, removing an exemption for all services, other than those supplied to “special investment funds”.

The move originally stems from a ruling by the Court of Justice of the European Union in 1999, and a subsequent change to UK law in 2005. HMRC had delayed removing the exemption while further relevant cases were decided.

In 2014, the CJEU decided that defined contribution occupational schemes qualify for treatment as a special investment fund, for the purpose of VAT exemption for fund management services.

With the conclusion of all connected cases and no review of EU policy likely before the UK leaves the bloc, HMRC has finally been forced to abandon its previous position of excluding all insurer-provided pension fund management from VAT, lifting VAT exemption from non-SIF fund management by insurers. The policy will come into effect on January 1 2018.

As far as defined benefit schemes go however, there’s some continuing uncertainty

Ian Neale, Aries Insight

Experts now anticipate further information from HMRC on the VAT treatment of schemes themselves, and are seeking ways to recover the costs of the tax.

Defined benefit schemes require greater clarity

The majority of insurer-delivered pension fund management is supplied to DC schemes. These will remain immune to VAT, given their treatment as SIFs.

Ian Neale, director at Aries Insight, said HMRC has been slow to provide clarity on VAT treatment of schemes. The industry is still awaiting a policy statement that extends beyond the DC arena.

“As far as defined benefit schemes go... there’s some continuing uncertainty,” he said.

In 2013, the CJEU ruled that DB schemes do not fall into the same category as unit trusts and investment trusts, and are therefore ineligible for VAT exemption. HMRC has announced a transitional period, now extended until the end of 2017, while it decides how to implement the change.

When it does update policy, the impact upon schemes will be felt differently by those where VAT will be paid by the employer, and schemes whose trustees will absorb the tax.

“It depends fundamentally on whether the employer’s paying or whether the scheme trustees are paying. If the scheme trustees are paying then the employer can’t recover the input tax,” Neale said.

“If the employer is paying for the services, then I suppose it will potentially increase their costs, and will basically add something to the burden that DB scheme sponsors increasingly face,” he added.

HMRC has more work to do

Adam Cutler, VAT director at auditors Crowe Clark Whitehill, echoed Neale’s frustrations over HMRC’s protracted dealing with the issue, and said the policy statement appears to be a defensive move. He described it as “a way of heading off some other litigation that’s at an early stage” about the unequal treatment between insurers and non-insurers.

“The issue that we’re trying to get resolved with HMRC is, ‘If VAT is charged on defined benefit pension schemes, how can the employer recover that VAT?’” Cutler said. He added that he had hoped for further detail from the body with regard to this problem back in April.

How to recover VAT

HMRC has offered two solutions with the intention of helping employers to recoup the costs of VAT. These are known as group VAT registration, and tripartite contracts.

In the case of group VAT registration, where the trustee is a corporate body, it is suggested it could become part of a VAT group with the employer. Services provided by third parties will then be deemed to have been delivered to the VAT group as a whole.

The tax would be recognised as having been incurred by the representative member and would be recoverable to the extent that the group recovers its VAT.

A tripartite agreement, which indicated that the services were made both to the trustee and the employer, could also aid VAT recovery.

Justin McGilloway, partner at law firm Wedlake Bell, said both methods are fraught with difficulties, creating confusion for advisers.

“These were the two suggestions that HMRC put out there, but to date we’ve had no definitive conclusion on which one is actually going to work properly, so we’re still grappling in the dark quite a bit,” he said.