Revenue & Customs Brief 06/14

VAT: CJEU judgment regarding deduction of VAT on pension fund management costs (PPG Holdings BV - C-26/12)

1. Purpose of this Brief

This brief sets out HM Revenue & Customs' (HMRC) position following the decision of the Court of Justice of the European Union (CJEU) in Fiscale Eenheid PPG Holdings BV cs te Hoogezand (PPG). The case 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.  The CJEU left it to the national court to determine whether those conditions were met in the case of PPG.

You can read the full text of the decision on the CURIA (Opens new window) website.

1.1 Readership

This Revenue and Customs Brief is aimed at:

  • businesses and other taxable entities that provide pension schemes for their employees
  • pension fund management providers
  • trustees of occupational pension funds
  • tax advisers.

1.2 Background

PPG, a Dutch company, established a defined benefit pension scheme for its employees. PPG was required by law to establish a pension fund, which had to be legally and financially separate from PPG.

PPG received supplies of pension administration and investment management services from third parties, paid the cost of these services and did not pass the costs on to the pension fund. PPG deducted the VAT it paid on the administration and management fees as input tax. The Dutch tax authorities challenged this position, PPG appealed and the Dutch court referred two questions to the CJEU, which can be summarised as follows.

1. Can an employer deduct the VAT incurred by it on administration and fund management services supplied to it in relation to the operation of a separate pension fund established for the benefit of its employees?

2. Can the defined benefit pension fund in question be classified as a ‘special investment fund’ so that the management of the fund was exempt from VAT?

CJEU Decision

1. The CJEU decided that an employer, like PPG, that has set up a pension fund that is legally and financially separate can deduct the VAT incurred on administration and pension fund management services, provided that there is a direct and immediate link between the services and the employer’s own supplies.

2. The CJEU did not answer the question concerning the liability of the pension fund management services as this point had already been addressed by the Court in the case of Wheels Common Investment Fund Trustees and Others C-424/11.

1.3 HMRC Previous Policy

Until now, HMRC policy has been to distinguish between costs incurred in relation to the:

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

HMRC previously allowed employers to deduct VAT incurred in relation to the general management (that is, 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.

1.4 Implementation of the Judgment

The CJEU has reiterated in PPG 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. A similar analysis can be applied to the financial investments. 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.

However HMRC will not accept that the VAT incurred in relation to pension fund management/administration is deductible by an employer in the following circumstances where the:

  • supplies were not made to the employer (this includes, but is not limited to, consideration of whether the employer has commissioned and paid for the services)
  • supply is limited to investment management services only (that is,  it is not a combined supply of both investment management and pension administration services).

Additionally, where the employer receives the supply but the pension fund bears the cost of the services (whether by way of reimbursement or a set off against pension contributions), HMRC will require an equivalent amount of output VAT in respect of the amounts reimbursed to be accounted for. This amount is potentially deductible by the pension fund to the extent that it is engaged in taxable business activities.

Where an employer is engaged in non-business activities or makes exempt supplies, it will need to take these into account when deducting any VAT incurred and restrict its deduction accordingly. Further information on the treatment of non business activities can be found at chapter 4.6 of Notice 700, The VAT Guide and on partial exemption in Notice 706, Partial exemption.

Public Notice 700/17 Funded Pension Schemes will be updated shortly to reflect these changes in VAT treatment.

Claims and Retrospective Action

From the date of this Brief, the policy outlined at 1.3 above will no longer apply, except as specified in the transitional rules below. The policy currently outlined in Notice 700/17 will be withdrawn with immediate effect except in circumstances where the pension fund is invoiced for services. In these circumstances, during a transitional period of six months, to allow time for businesses to adapt in response to this Brief, the pension fund and the employer may continue to agree to a 70/30 split on the terms set out in that Notice.

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 (outlined at 1.3 above) and the criteria outlined at 1.4 above were not met.

Businesses that provide pension schemes for their employees and receive supplies of services that fall within the criteria outlined at 1.4 above are entitled, but not obliged, to claim a refund of any input VAT which has not previously been claimed. Where a business has chosen to apply the 70/30 split, a claim for a refund would entail a recalculation of the amounts of input tax proper to the employer and the fund respectively.

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 in the case of ATP Pension Service A/S C-464/12. The CJEU may decide that VAT should not have been charged on such services. In such circumstances, HMRC will take the appropriate steps to protect their position in relation to input tax claimed for the management of defined contribution pension schemes. This will include the issuing of assessments to recover any VAT deducted that was incorrectly charged.

Public Notice VAT 700/45 How to correct VAT errors and make adjustments or claims explains how to go about claiming a refund in this circumstance.

Claims for under-declared input tax are subject to the normal capping rules. Claims for repayment will therefore not be considered for periods ending more than four years before the date on which the claim is made.

Any claim made must set out the basis of the error and the amount being claimed and show how that amount has been calculated. The claim should also make it clear whether the claim is in relation to VAT incurred in relation to a defined benefit or a defined contribution pension scheme. The claimant must be able to provide copies of the documentation used in the calculation of the claim on request. An 'estimated' claim, or a declared intention to lodge a claim at a future date, will not stop the clock running on the four year cap.

All claims resulting from the changes outlined in this Brief should be sent to:

Email: vat.ppg.claims@hmrc.gsi.gov.uk
or
by post to:
HMRC
VAT Repayments Team S0483
PO Box 200
BOOTLE
L69 9AH
Businesses that have already made a claim will now have their claims processed. However, they may wish to provide details of their claim to the email address above to ensure claims are dealt with promptly.

Issued 3 February 2014