HMRC buys more time on EU VAT issue

A 2013 ruling by the Court of Justice of the European Union had established that employers would be unable to claim VAT relief on services provided to another organisation, putting the UK’s long-standing ‘70/30’ system in breach of EU law.

HMRC has since been trying to find solutions that allow employers to recover some VAT while obeying the new case law, but this week announced that difficulties reconciling the two objectives mean no decision will be reached until the end of 2017.

In the wake of the referendum in June, all branches of government have perhaps bigger fish to fry

Ian Neale, Aries Insight

The brief also extended the transitional period, during which employers and schemes can operate either the traditional system or a new arrangement, to the same date.

HMRC also hinted at a further delay, announcing: “Towards the end of this period we’ll review this position and consider the need for a further extension if necessary.”

Waiting for Brexit

“Reading the brief I think it’s clear they’re playing for time,” said Mark Simpson, tax strategy and benefits partner at law firm Squire Patton Boggs. He said it was likely HMRC will wait for Brexit negotiations to progress before issuing guidance.

“If Brexit means Brexit and we do leave the European Union on terms that mean that the European court no longer has an impact on the UK, I suppose in an ideal world they can leave things as they were,” he said.

At present VAT can be reclaimed on the costs of setting up and day-to-day administration of occupational DB pension schemes, but not on investment management costs.

Where both costs were contained in a single invoice, employers could recover 30 per cent of the VAT and the scheme the remaining 70 per cent.

If EU rulings do still have force of law in the UK, and schemes and employers are unable to implement a new tax structure before the end of the transition period, most employers would be unable to reclaim VAT on pensions administration, as in the current system.

“It’s potentially very expensive,” said Simpson, predicting it could accelerate the rate of scheme closures.

However, Matthew Swynnerton, pensions partner at law firm DLA Piper, disagreed. “I’m not sure it’s of that order of magnitude,” he said. “Even after scheme closure, trustees still have investment duties; they’ll still be incurring a lot of these costs.”

Nonetheless, schemes and employers will be relieved not to be forced into changing their tax structures anytime soon. Ian Neale, director at Aries Insight, said schemes should be wary of implementing change before the situation becomes clearer.

“It avoids the incurring of additional administrative costs in reorganising which might… turn out to be unnecessary or have to be reversed,” he said.

He added that HMRC could be too busy at present to make complex changes to the current system. “In the wake of the referendum in June, all branches of government have perhaps bigger fish to fry.”

Finding a solution

A viable solution will need to be found if the UK’s compliance is enforced. Previous proposals have included tripartite contracts, signed by employer, trustee and provider.

However, HMRC reiterated in the brief that implementing this structure means employers will probably be unable to reclaim 20 per cent corporation tax.

“They’ve been offered all sorts of solutions to that corporation tax problem and it wouldn’t have been beyond the wit of man to solve it,” said Richard Woolich, tax partner at DLA Piper.

David Brooks, pensions technical director at consultancy Broadstone, predicted some schemes will look to set up a trustee company, which is paid by the employer to carry out and contract out administrative services.

Employers would then be able to show that they have received a service, and could recover tax accordingly.

“It’s easier from our point of view, we don’t have to rewrite all our terms and everything, so we continue the engagement with the trustees,” he added.

Brooks also urged HMRC to be more transparent about its consulting process.“It’s a little bit annoying when you hear that other stakeholders are getting details over the summer,” he said.

“There’s lots of other people around who don’t know what’s going on, and it was such a potentially big issue.”