Schemes face costly tax defeat after HMRC ruling

HMRC’s interpretation of a ruling by the Court of Justice of the European Union from last year means VAT on administration services supplied to schemes is only recoverable by the sponsoring employer if it commissions and pays for services – though further guidance is expected.

Previously this tax was recoverable on administration services commissioned by and delivered to the trustees.

Schemes have been encouraged by legal representatives to talk to their sponsor about recovering VAT costs, and consider reviewing their invoicing and contractual arrangements in light of the new interpretation.

The ruling, handed down in July 2013, applied to the PPG Holdings BV case, which focused on an employer’s right to reclaim VAT on administration and management services supplied to a DB scheme. The CJEU ruled that employers were entitled to reclaim the tax.

At the time it was widely believed the court’s decision would lead to schemes recovering investment management fees, which was only permitted when there was a mixed invoice covering a range of fees. In such cases 30 per cent of VAT could be recovered.

“In the past it wasn’t possible to recover VAT on investment costs,” said Zoe Murphy, partner at law firm Sackers. “People thought the case meant people would be able to start recovering investment management charges.”

Instead, HMRC’s ruling restricts the recovery of VAT on administration and investment costs, which may increase the financial burden of the scheme.

But it is not yet clear whether the changes to VAT rules will remain in place. In its most recent announcement, HMRC said it had been in “extensive” discussions with the industry since revealing its position.

The statement said: “Further guidance will now be issued on how both judgments are to be implemented, including a transitional period in which to make any changes.”

This has led some to believe HMRC may change its stance.

Mark Hampson, senior manager at accountancy Grant Thornton, said: “What was good news has been turned into potentially bad news by HMRC… We will find out in [the] autumn.”

The ruling currently only applies to DB schemes. HMRC is considering the implications of a CJEU ruling over Danish pension provider ATP, in which it ruled that defined contribution schemes could be special investment trusts. The outcome could mean management fees for DC schemes are VAT exempt.

“It’s going to be a challenge if HMRC does take a restrictive view,” said Dana Burstow, partner at law firm Allen & Overy. “For smaller schemes it’s a case of wait and see, but bigger schemes should be looking at it.”