Partner Article

VAT windfall for pension funds

The announcement that HMRC is changing its policy on the recovery of VAT relating to the management of defined benefit pension funds, could lead to a significant VAT windfall for employers.

In recognising a EC ruling that pension fund management and operation costs are costs of the employer, HMRC advise that where an employer receives a ‘single’ invoice covering a fund’s management and administration services, the employer may be entitled to recover the invoice’s VAT element.

Historically, employers could only recover VAT on administration services which were separately invoiced, or, where a single invoice covered administration and management services, employers could recover 30% of the total VAT - with the remaining 70% being costs of the fund.

HMRC also stated that, where it can be shown that there’s a ‘direct and immediate link’ between fund management costs and a business’s taxable activities, employers can deduct the VAT paid on services relating to the management and operation of that fund.

Until recently, with exceptions such as superannuation schemes, employer pension funds were optional. However, with the introduction of mandatory auto-enrolment, it will become incumbent on employers to establish a pension fund as a legally and fiscally separate entity to safeguard the pension rights of existing and former employees.

As mandatory auto-enrolment places responsibility on employers to bear the fund’s costs, the new UK regulatory and legal structure of employer pension schemes does appear to put the pension schemes of UK employers on the same footing as the mandatory pension scheme considered by the EC.

As such, HMRC’s ‘direct and immediate link’ test would appear to be met by all UK businesses implementing auto-enrolment. Namely, if a business is legally required to make pension provision for its employees the costs of the management of that pension fund must be a cost component of the price of goods and services supplied, creating a direct link with the business’s economic activity.

HMRC has only addressed defined benefit schemes, but there’s an argument before the EC that the management of contribution schemes should be VAT exempt. Investment Management Association figures indicate that some £1.9 trillion of pension fund assets are managed in the UK. Assuming the OECD average investment management fee of 0.5% of assets managed, then the VAT savings on both defined benefit and defined contribution pension schemes could amount to £1.9 billion.

This was posted in Bdaily's Members' News section by Baker Tilly .