Personal Pension  

HMRC widens window for deducting VAT on pension costs

HMRC widens window for deducting VAT on pension costs

HM Revenue & Customs has announced a 12-month extension to the transitional period under which an employer is entitled to deduct VAT paid on services.

These services are those relating to the administration of defined benefit pension schemes and the management of their assets.

The transitional period, which was due to end on 31 December 2016, has now been extended to 31 December 2017.

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Given the contractual, regulatory, independence and accounting issues which HMRC will have to reconcile, accountants predict we are unlikely to see any further guidance on VAT recovery of pension costs until at least Autumn 2017.

HMRC has been attempting to reconcile the European VAT Court’s decision in PPG Holdings with pension and financial service regulations, accounting rules, and the implications of corporate tax deduction.

The PPG Holdings case concerned an employer’s entitlement to deduct VAT paid on pension fund management services (i.e. the administration of the pension and the management of the assets of a fund) in relation to defined benefit (DB) pension schemes.

The court ruled in circumstances where the employer paid those costs and did not pass them on to the pension fund, the employer was entitled to recover the VAT incurred thereon.

HMRC has historically denied VAT recovery by the employer in respect of investment management costs but allowed recovery of administrative costs.

As a result of the ruling, HMRC could be hit with significant claims from affected businesses.

Ian Bell, head of pensions at accounting firm RSM, said: “Trustees of pension schemes and sponsoring employers have, for some time, been anxiously awaiting some further clarification from HMRC of its policy regarding VAT recovery conditions of employers and trustees of DB pension schemes.

“When you consider that the European Court of Justice decision in PPG Holdings dates back to 18 July 2013, it beggars belief that we still do not have any definitive guidance which takes account of not only the VAT position, but also contractual, regulatory, independence, accounting and direct tax issues.”