Partner Article

Double whammy for employer pension funds

Within the last week, a senior European lawyer has cast doubt on employers’ rights to recover VAT on costs incurred in the day-to-day management of funded pension schemes, while at the same time HMRC has announced that pension consultants can no longer receive commission-based remuneration and must charge VAT on consultancy charges to the employer. Adding the two together could result in significant costs for employer pension schemes.

The Advocate General (AG) considered that, although the day-to-day management of an employer’s pension fund (including the administration, asset management, auditing and consultancy) have a link to the employer’s activities, these are more closely and directly linked to the investing activities of the pension fund. It is the AG’s opinion that, because the employer and pension fund are legally and fiscally distinct, VAT incurred on fund management costs, contracted for and invoiced to the employer, is input tax of the fund.

HMRC however accepts that VAT incurred on start-up costs, and in the day-to-day management of an employer pension fund (e.g. accountancy, audit, actuarial valuations and advice, review of the scheme etc.) are costs of the employer, and fully recoverable subject to partial exemption rules. HMRC has also announced this week that as a result of Retail Distribution Review (RDR) changes, pension consultants can no longer receive VAT-free commission-based remuneration for the setting up and administering workplace contract-based pensions. Instead they must agree consultancy charges subject to VAT at the standard rate, with HMRC unequivocal that employers will normally be able to recover VAT charged on these services as input tax, subject to partial exemption and input tax rules.

The costs of administering pension schemes are significant and could potentially take resources away from scheme members’ pensions - indeed HMRC has identified that the administrative costs to employers as a consequence of auto-enrolment reforms are estimated to be around £444m in the first year, with ongoing administrative costs of around £127m per year. Adding irrecoverable VAT to these costs could make a substantial difference to the size of an individual’s final pension pot.

We will now have to wait for the Court of Justice’s final decision on this, but notwithstanding the contents of HMRC’s latest announcement, if it agrees with the AG’s Opinion then this may lead to yet another review of UK pension scheme costs recoverable by an employer.

This was posted in Bdaily's Members' News section by George Bull .