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Change to VAT treatment of pension fund management charges.

HMRC has now published its Revenue & Customs Brief (RCB) 03/17.

17 October 2017

If you thought that this was the long anticipated confirmation of HMRC’s policy on the VAT treatment of pension fund management costs and perhaps an extension to the transitional period in general, you would have been disappointed.

Instead, this RCB concerns HMRC’s policy change to the VAT treatment of charges made by insurers in respect of the management of Defined Benefit (DB) pension schemes.

Currently, charges by insurers in respect of their supply of the management of either the Defined Contribution (DC) or Defined Benefit (DB) pension schemes are treated as exempt from VAT.

However, this RCB now confirms that with effect from 1 January 2018, HMRC’s policy would be that all fees charged by insurers in respect of management of DB schemes will become subject to VAT, thus bringing them in line with other suppliers.

There are suggestions that this might be a cynical approach by HMRC to get around litigation that is currently awaiting a hearing at the courts on the question of: Whether HMRC policy is in breach of the EU principles of fiscal neutrality and that of equality regarding the VAT treatment of fees charged for the management of DB schemes. Essentially, the EU doctrines require the equality of treatment for taxpayers in the same or similar circumstances, such that from a VAT perspective, taxable persons undertaking similar transactions should expect to be treated in exactly the same way.

The implication of this policy change is that from 1 January 2018, all suppliers pf DB Schemes would be required to treat their supplies as liable to VAT at the standard rate.

This may be an attempt by HMRC to end some litigation that is at an early stage concerning the unequal treatment of charges to DB schemes. In practice, HMRC suggest that this policy change will make little difference, as insurers are mostly managing DC schemes. The services to these schemes will remain exempt from VAT.

Further guidance in the near future?

It is only to be hoped that this represents the first of a number of policy announcements from HMRC, and that there will be guidance on the other outstanding areas in the near future.

What should you do?

Sponsoring employers and pensions trustees that work with insurers to manage their pension scheme should discuss with their suppliers what this change in interpretation from HMRC will mean. For defined benefit schemes, a VAT charge by the supplier is likely to lead increased amounts of irrecoverable VAT in the hands of the pension scheme. This then calls into greater focus the need to consider whether steps can be taken to enable the sponsoring employer to recover the VAT rather than the underlying fund itself.

How we can help

To discuss this policy change or other issues surrounding VAT and pension schemes, please get in touch.

About the author

Thomas Mobee

+44 (0)20 7556 1320
mobeet@buzzacott.co.uk
LinkedIn

17 October 2017

If you thought that this was the long anticipated confirmation of HMRC’s policy on the VAT treatment of pension fund management costs and perhaps an extension to the transitional period in general, you would have been disappointed.

Instead, this RCB concerns HMRC’s policy change to the VAT treatment of charges made by insurers in respect of the management of Defined Benefit (DB) pension schemes.

Currently, charges by insurers in respect of their supply of the management of either the Defined Contribution (DC) or Defined Benefit (DB) pension schemes are treated as exempt from VAT.

However, this RCB now confirms that with effect from 1 January 2018, HMRC’s policy would be that all fees charged by insurers in respect of management of DB schemes will become subject to VAT, thus bringing them in line with other suppliers.

There are suggestions that this might be a cynical approach by HMRC to get around litigation that is currently awaiting a hearing at the courts on the question of: Whether HMRC policy is in breach of the EU principles of fiscal neutrality and that of equality regarding the VAT treatment of fees charged for the management of DB schemes. Essentially, the EU doctrines require the equality of treatment for taxpayers in the same or similar circumstances, such that from a VAT perspective, taxable persons undertaking similar transactions should expect to be treated in exactly the same way.

The implication of this policy change is that from 1 January 2018, all suppliers pf DB Schemes would be required to treat their supplies as liable to VAT at the standard rate.

This may be an attempt by HMRC to end some litigation that is at an early stage concerning the unequal treatment of charges to DB schemes. In practice, HMRC suggest that this policy change will make little difference, as insurers are mostly managing DC schemes. The services to these schemes will remain exempt from VAT.

Further guidance in the near future?

It is only to be hoped that this represents the first of a number of policy announcements from HMRC, and that there will be guidance on the other outstanding areas in the near future.

What should you do?

Sponsoring employers and pensions trustees that work with insurers to manage their pension scheme should discuss with their suppliers what this change in interpretation from HMRC will mean. For defined benefit schemes, a VAT charge by the supplier is likely to lead increased amounts of irrecoverable VAT in the hands of the pension scheme. This then calls into greater focus the need to consider whether steps can be taken to enable the sponsoring employer to recover the VAT rather than the underlying fund itself.

How we can help

To discuss this policy change or other issues surrounding VAT and pension schemes, please get in touch.

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