April 2019 is likely to be a busy month in the U.K. value-added tax (“VAT”) calendar, with major developments taking place such as Making Tax Digital for VAT and the U.K.’s potential withdrawal from the EU.
A less high profile, but still potentially financially significant development, which could be overlooked by pension schemes and/or their employer entities, concerns pension fund VAT; specifically the withdrawal of VAT exemption for investment management services to Defined Benefit (“DB”) schemes provided by regulated insurance companies.
In November 2017, HM Revenue & Customs (“HMRC”) issued Revenue and Customs Brief 3 (2017), concerning the VAT treatment of pension fund management services to DB schemes provided by regulated insurance companies.
HMRC currently allows all pension fund management services provided by regulated insurance companies to be exempt from VAT. The Court of Justice of the European Union has previously determined that occupational Defined Contribution (“DC”) pension schemes qualified as special investment funds (“SIFs”) and so qualified for a VAT exemption on fund management services.
However, there have been a number of court cases considering whether the exemption could be applied to occupational DB schemes.
HMRC has announced that its policy to treat these services to DB schemes as VAT-exempt insurance is to be discontinued from April 1, 2019.
From that date forward the services will be subject to standard-rate VAT. There will be no change in relation to DC schemes.
In Revenue and Customs Brief 3, HMRC suggested that the majority of pension fund management services provided by insurers are supplied for DC pension funds, and therefore qualify, and have always qualified, for VAT exemption as SIFs.
However, it is worth noting that there are also a large number of DB schemes that work with insurers. Given that most DB schemes recover very little VAT, this could be a significant change that leads to increased VAT costs for those schemes.
As with all VAT changes, it will be important to assess the specifics of individual facts to understand whether the changes will apply.
Further Changes Possible
Organizations will need to understand the specific scope of the VAT rule changes. Exemption is still expected to apply for pension fund management services provided to “pooled mandates,” although the position is currently unclear.
It has been suggested that HMRC will be issuing further guidance to confirm the position for pooled mandates and pension fund management services provided under a contract of insurance.
In addition, the current High Court decision in the ongoing case of United Biscuits supports the changes HMRC are making. However, United Biscuits has appealed the High Court decision that its services fall outside the scope of exemption and further developments in the litigation are expected this year.
Pension schemes and their suppliers will therefore be monitoring this case with interest.
For now, DB schemes are encouraged to not lose sight of the impending rule changes, and to review their arrangements to establish:
- which providers may currently be taking advantage of the VAT exemption;
- whether for those specific services there will be a change from exemption to VAT being charged.
DB schemes should also consider approaching their provider to understand how the provider intends to manage this change.
In situations where it appears likely that VAT will be charged with effect from April 1, 2019, it should be noted that there were changes announced by HMRC in 2017 to the VAT recovery position for pension fund VAT costs incurred by sponsoring employers and their funded pension schemes.
Organizations may therefore wish to review these arrangements to assess whether the financial impact of the additional VAT charges can be mitigated.
If organizations are unclear on their VAT obligations, they should seek specialist advice where possible.
Robert Marchant is VAT Partner with Crowe, UK.
He may be contacted at: firstname.lastname@example.org