VAT and pension schemes – where are we now?

The VAT situation for defined benefit (DB) pension schemes continues to be challenged through the courts, and it is important for scheme sponsors and trustees to stay abreast of the situation to ensure that claims for their schemes are made at the right time.

For investment management (IM) services, there remains the potential for protective claims which could provide benefit to DB pension schemes.

By way of background, these changes are as a result of two cases that were decided by the Court of Justice of the European Union:

  • Fiscale Eenheid PPG Holdings BV, commonly referred to as the PPG case. HMRC released Revenue & Customs Briefs 43 (2014) and 8 (2015) covering the changes. In principal, VAT incurred on IM services could now be reclaimed by employers who operate a DB pensions scheme, though there has been much discussion as to the mechanics of making such claims to the extent that HMRC has extended the transition period until 31 December 2017 (as detailed in Revenue & Customs Briefs 17 (2015) and 14 (2016)).
  • Wheels Common Investment Fund Trustees and Others, commonly referred to as the Wheels case. This argued that the definition of a special investment fund (SIF) should be expanded to include DB pension schemes and, therefore, IM services, provided to DB pension schemes, should be exempt from VAT. The European Court disagreed and by virtue of this, ruled that IM services provided to DB pension schemes remained liable to VAT at the standard rate.

So where are we now?

There is now a further twist, as the decision in Wheels is being appealed at the High Court by an end consumer (United Biscuits), and a provider of IM services to a DB pension scheme (First State).

The current appeal is being made on the basis of a potential distortion of competition, namely that the principal of fiscal neutrality is not being maintained as insurance companies can and do provide IM services to DB schemes whilst benefiting from VAT exemption, whereas all other IM service suppliers are required to account for VAT.

What should you do now?

At this time, and subject to a successful outcome in the Wheels appeal, IM service providers should continue to account for VAT at the standard rate on supplies made to DB pension schemes and employers should continue to reclaim the VAT incurred, if they meet the conditions of HMRC’s published guidance.

Should the High Court appeal be successful, we recommend all DB pensions schemes take the opportunity to maximise the potential impact, by contacting their IM service providers to ensure:

  • the IM service provider is standing behind the appeal; and/or
  • that a protective claim, backdated up to four years, has been submitted to HMRC.

The above action will safeguard the VAT which has been charged by the IM service provider, by ensuring HMRC are required to provide a refund to the IM service provider. This will in turn provide a VAT refund to the employers.

RSM would be happy to provide a template letter that will ensure trustees of DB pension schemes are asking the right questions to their IM service providers. Alternatively we can liaise directly between DB pension schemes and IM service providers in relation to this matter. As this type of litigation can go on for years, it is important to act now as all protective claims can only be backdated up to four years.