Fresh guidance from HM Revenue & Customs on VAT charges for scheme management services may have passed people by during the holiday slowdown.
VAT on services provided to pension schemes across the spheres of administration, investment, legal provision and consultancy are now recoverable, providing the employer is both a party to the services contract and has paid for them.
The news of a potential 20 per cent reduction in costs and a fairly generous four-year adjustment window from our friend the tax man provides schemes with a welcome windfall in tough times.
Both defined benefit and defined contribution schemes may be in a position to recoup substantial VAT payments on past service provision, lawyers believe.
Successful recovery will be dependent, however, on employers seeking advice and taking the necessary steps to maximise their tax positioning across contracts and invoices.
“Schemes should be looking carefully at the way in which they organise the provision of service from third-party providers and how to organise their affairs to best maximise recovery,” says Lesley Harrold, senior knowledge lawyer at law firm Norton Rose Fulbright.
Industry experts see significant value in schemes putting in the legwork to both reclaim past payments and rewrite contracts to maximise recovery benefits in the future.
The value of recoverable VAT payments is dependent of course on the size of the scheme, but experts estimate that for some employers the rebate could amount to a five or six-figure sum.
This could be the El Dorado of tax rebates. “If I was a finance director of one of the employers concerned I would be focusing some time on this,” says Ian Neale, director of Aries Pension & Insurance Systems.
Maximising recovery
To take advantage of HMRC's new position, schemes need to review their agreements with service providers and ensure they are party to those contracts. Harrold encourages schemes to review contracts earlier rather than later to avoid unforeseen problems.
“Services need to be set up to benefit the employer. Extension of the transitional period to year end 2015 is generous, but these things take time to examine; there could be unforeseen circumstances,” she says.
There is not however, a one-size-fits-all approach to maximising recovery. “Each particular set of facts and circumstances would need to be assessed on their own merit," says Chris Bates, partner at Norton Rose Fulbright.
“Maximal recovery could be achieved when external services are provided to trustees, who themselves are registered for VAT and who are charging the employer VAT on the provision of services,” he adds.
Pension funds and trustees are not usually considered taxable individuals, but if they provide services to employers VAT can be recovered on any charges made.
Legal clarification
Employers will need to clarify their legal standing where trustees are bound by statute to pay for services. Fund manager selection and charges are the direct responsibility of trustees, making it difficult for employers to recover VAT on payments.
An area of debate following the briefing in November, concerns persist about how in practice employers can reclaim VAT on management fees that trustees are required by statute to pay.
Chantal Thompson, partner at law firm Baker & McKenzie, sees a potential solution through the addition of a side note to contracts.
“To meet the requirements of brief 43 you could have a side letter with reference to fees being relevant to employers' business and own costs. The employer pays the fees even though the direct client is the trustee,” she says.
Sweat the small stuff
Pensions lawyers expect there will be significant demand on schemes to provide exhaustive detail on the costs and payments made on services both retrospectively and moving forward.
It seems unlikely that HMRC will hand over 20 per cent of bills without a fight. “I imagine they’ll want all the t's crossed and i's dotted… HMRC will press funds making a claim to provide very detailed information before they agree to process [them],” says Bates.
Thompson says schemes and advisers may be a little reluctant to entirely commit to a response when further guidance and clarity from HMRC is pending.
“It would be really helpful to know what HMRC expects from a scheme. We haven’t reached the end of the story on this one yet,” Thompson adds.
