HMRC changes VAT rules for DB sponsor employers

HMRC HAS AMENDED its VAT rules to allow defined benefit (DB) pension sponsors to reclaim input tax in some circumstances.

The change follows a Court of Justice of the European Union (CJEU) in the case of PPG Holdings against the Netherlands tax authority Financial Director’s sister publication Professional Pensions reports. 

The court held that both day-to-day management costs and investment costs may be reclaimed by employers; previously only administration costs were VAT exempt for sponsors.

An HMRC briefing confirmed that under the new policy “there are circumstances where employers may be able to claim input tax in relation to pension funds where they could not previously”.

Partner at law firm Eversheds and tax expert Giles Salmond, said the development “represents a major change for the UK VAT treatment of pension fund managers’ costs”.

He explained: “Hitherto, HMRC has not permitted the employer to recover the VAT on investment activity costs, but they have allowed, in certain circumstances, recovery of the costs associated with the setting up and day-to-day administration of the pension fund.

“Where fund managers issued a single VAT invoice for both general management and investment management HMRC has generally allowed the employer to recover 30% of the VAT invoiced.

“HMRC has now withdrawn the so called 70/30 split treatment of fund managers’ costs. In the light of PPG, HMRC has taken a very narrow approach, but will accept retrospective claims for overpaid VAT where the fund manager’s costs for both operational and investment management are invoiced to the employer.”

Salmond said the changes “are likely to represent an additional cost to employers of running their pension funds”.

However, he added: “The judgement of the CJEU in PPG Holdings does represent an opportunity for employers and the pension funds themselves to consider the arrangements which they currently operate, particularly as most UK pensions operate under a trust.

“Any changes that employers may consider in the light of PPG need to consider not only the tax position but that of the pension trust itself.”