The above Brief sets out HMRC’s position following the decision of the Court of Justice of the European Union in Fiscale Eenheid PPG Holdings BV cs te Hoogezand (PPG) which concerned an employer’s entitlement to deduct VAT paid on services relating to the administration and management of a defined benefit pension scheme.

The CJEU ruled that, subject to certain conditions, the employer was entitled to deduct the VAT it paid on services relating to the administration of its employees’ pensions and management of the assets of the pension fund set up to safeguard those pensions, where the pension fund was a legally and fiscally separate entity.

Until the case, HMRC policy was to distinguish between costs incurred in relation to the:

• setting up and day to day administration of occupational pension funds; and
• management of the investment activities of the fund.

HMRC previously allowed employers to deduct VAT incurred in relation to the general administration of an occupational pension scheme on the basis that these costs are overheads of the employer and thus have a direct and immediate link to their business activities.

In respect of investment management costs, HMRC considered these costs to be of the pension fund itself and to relate solely to the activities of the pension fund. To the extent that these inputs were deductible, they were deductible by the fund and/or trustees of the fund.

Where a single invoice was received covering both the administration of the pension fund and the management of the investments in the fund, HMRC allowed the employer to claim 30% of the VAT as relating to the general management of the scheme and the pension fund to claim 70% as relating to the investment management.

The CJEU has reiterated in the PPG case that, in order to deduct the VAT incurred on a cost, a business must establish a direct and immediate link between the supply received and the taxable supplies that the business makes. Whether there is a direct and immediate link will depend on whether the cost of the input services is incorporated in the price of the supplies made by the business. A cost may either be incorporated in the price of specific supplies or groups of supplies, or be part of its general costs and incorporated in the price of all the supplies made by the business. If a cost has a direct and immediate link to specific supplies or groups of supplies, then it cannot also be part of its general costs.

In respect of specific costs of investment management, these will have a direct and immediate link to the supplies of the investments themselves. For example, the costs of managing a property within a pension fund will have a direct and immediate link to the rental income derived from the property. They cannot therefore be general costs of the employer.

However, where the services received go further than the management of the investments, they may be general costs. Therefore, provided that the supply is received by the employer, the VAT incurred will potentially be deductible by the employer.

As a result, HMRC is changing its policy on the recovery of input tax in relation to the management of pension funds. This means that there are circumstances where employers may be able to claim input tax in relation to pension funds where they could not previously. The Brief outlines the process to be undertaken to claim under-declared input tax and the circumstances where HMRC will not accept that the VAT incurred in relation to pension fund management/administration is deductible by the employer. A number of transitional provisions have also been made and it is stressed that HMRC do not intend to take any action to correct the position in cases where the employer has deducted a proportion of the VAT under the existing treatment and the criteria outlined in the Brief were not met.

Whilst the liability of management services in respect of defined benefit pension schemes has now been determined by the CJEU, a judgment on the liability of management services in respect of defined contribution pension schemes is expected soon from the CJEU.