It’s one we’ve seen coming for a long time. And after years of uncertainty and consultation, HMRC has announced that the existing rules for VAT recovery used by most Defined Benefit (DB) pension schemes employers will… wait for it… carry on as it is now.
When you calculate the tax for a DB pension scheme, existing rules allow you, as an employer, to deduct the VAT incurred from the admin costs associated with the pension scheme.
This is on the basis that these costs were your overheads. What are admin fees? Well, you might call our fees admin fees. Or you might have an administrator for the scheme who charges fees too.
If you’re an employer that doesn’t pay for admin fees or services from someone like us, you can still continue to deduct VAT incurred on other things such as expenses on the scheme’s day-to-day administration.
Administration vs investment costs
We’ve mentioned admin fees above. But then there’s also investment expenses. These will come from investment managers such as Legal & General, BlackRock and so on.
Where you have an invoice that relates to both admin and investment, you’re able to use the “70/30 rule”, which means 30% of the invoice can be recovered for VAT purposes.
If you have a relationship with an investment manager directly
The pension scheme trustees would usually be the ones to have a relationship with your investment manager. But if not, under HMRC’s latest guidance, as an employer you may be able to change to a different arrangement where you can deduct VAT incurred both on investment and administration services.
For example, VAT can be recovered on both administration and investment management costs, providing you’re an employer and you have a direct relationship with an investment manager. (That’s as opposed to having a relationship with trustees, who manage that relationship on your behalf.)
New options to enhance VAT recovery
In their new guidance, HMRC also set out other structuring options that could enable employers to enhance their VAT recovery. These include the following:
• a three-way contract between the investment manager, trustees and employer – HMRC say this route is only open to DB schemes
• where the trustees have a contract with the employer to run the pension scheme on their behalf
• through the trustees setting up a trustee company, and VAT grouping with the employer.
Things might not be straightforward just yet. HMRC haven’t issued guidance on the corporate tax implication of the arrangements above but we’ll be keeping our eyes peeled – we assume this VAT Public Notice will soon be updated.
If you’d like to be a bit clearer on any of the above, please get in touch.