News Analysis: Employers need a better way of reclaiming VAT on behalf of their schemes than that set out by HMRC, lawyers say, as a December deadline for schemes to renegotiate service contracts looms.
Rules put forward by HMRC earlier this year state that employers and their pension schemes must have tripartite contracts with suppliers in place before employers are allowed to claim back any VAT charged on the services provided to schemes.
Traditionally, contracts were made with one party only, and the employer was able to reclaim VAT on behalf of the scheme, but a European court ruling prompted the change in HMRC’s approach.
However, the Association of Pension Lawyers said that rather than through tripartite agreements, companies should be able to recover VAT by adding a rule to a scheme’s trust deed.
One short rule amendment would cover all the scheme’s contracts
Anna Rogers, APL
The rule would state that services supplied to run the pension scheme are provided for the benefit of the sponsor, even though legally the scheme is set up as a trust.
“One short rule amendment would cover all the scheme’s contracts,” Anna Rogers, chair of the APL, said. She added this would be more pragmatic, “with less cost and hassle to the [defined benefit] schemes that may be looking at these issues”.
With the deadline for setting up such agreements looming on December 31 this year, Rogers said time was running out for employers and pension schemes to renegotiate their contracts.
HMRC said it had worked with industry representatives to provide guidance on tripartite agreements, after some employers expressed concerns that directly contracting for pension fund management services might be difficult from a regulatory context.
A spokesperson said: “HMRC understood at the time that these arrangements generally met with industry approval."
The pending guidance will cover proposed arrangements other than tripartite agreements, but “the general principles… will remain unchanged”.
The Association of Consulting Actuaries and the Society of Pension Professionals voiced support for the APL’s suggestions, while the National Association of Pension Funds said it was broadly in favour, especially if VAT recovery by employers meant they would increase contributions into schemes.
Conflict of interests
Martha Quinn, pensions lawyer at consultancy Spence & Partners, said one of the problems with tripartite agreements was the potential for conflicts of interest.
“The legal aspects of them sometimes are quite specific to one party or the other and I can see there is a lot of scope for conflict of interest,” she said.
Richard Butcher, managing director at professional trustee company PTL, said such conflicts can be overcome.
“The trick is to identify them and behave appropriately to manage them properly,” he said.
However, Butcher voiced concerns about whether the VAT discussion would be resolved any time soon. He added: “They’re quite reluctant to let go of the VAT… It’s in HMRC’s interest to hold the money.”
Butcher said this was a driver behind HMRC changing the requirements for employers to reclaim VAT.
“They’re making it as difficult as possible I think for us to reclaim VAT,” he said. “I’m anticipating they will continue to make it difficult.”
But HMRC denied it was stalling on finding a solution or that it is attempting to keep hold of VAT.
A spokesperson said: “HMRC only collects the tax due in law and is seeking to implement a judgment of the European Court in a way that is consistent with VAT legislation and case law.”
The spokesperson added: “The updated guidance will be shared in draft with industry for comment shortly."
