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Employer pension schemes in line for VAT windfall

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29th Jul 2013
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Employers operating pension schemes under auto enrolment could be able to reclaim VAT, if there is a direct link between employer costs and a business’ taxable activities, according to Baker Tilly.

If allowed, there could be a potential £1.9bn of VAT at stake.

In the case of Dutch industrial group PPG Holdings BV, the Court of Justice of the European Union (CJEU) ruled that subject to certain conditions, an employer should be able to reclaim VAT on both the day-to-day management of a pension scheme and management of investments.   

It ruled that pension fund management and operation costs are costs of the employer.

Therefore, if it can be proven that there is an immediate link between those costs and a business’ taxable activities, an employer setting up a pension fund as a legally and fiscally separate entity can deduct the VAT it has paid on services relating to the management and operations of that fund.

Baker Tilly associate director David Wilson said that as the Netherlands applies a mandatory pension scheme similar to auto enrolment in the UK, being phased in over the next five years, the ruling could also apply to UK employers.

“As this places a responsibility on employers to bear the fund’s costs, the new UK regulatory and legal structure of employer pension schemes does appear to put the pension schemes  of UK employers on the same footing as the mandatory pension scheme considered by the EU,” he said.

“If the scheme is incurring overhead and economic costs to the employer, there must be case for employers to recover VAT.”

But Wilson warned that any bid to reclaim VAT from HMRC on such schemes will most likely be challenged by HMRC.

According to Baker Tilly, the Revenue currently accepts that VAT incurred on start-up costs and through the day-to-day management of an employer pension fund are employer costs and recoverable, subject to partial exemption rules.

But investment activity costs are costs of the fund, HMRC says, and the costs to funds of administering pension schemes are significant and could take resources away from scheme members’ pensions.

Therefore, Wilson said, it appears that all pension scheme costs would have a direct and immediate link to the activities of the employer, leading to a potential full VAT recovery on all pensions scheme costs.

“There will be legal arguments by HMRC, who may say the costs lie with the fund manager, but there is case law that states that just because costs are incurred by one party, they can’t reclaimed by another,” he added.

And there may even be opportunities for employers currently operating auto enrolment pension schemes to attempt to reclaim VAT now.

“It does depend on the contractual position of employers, but there is an opportunity to make a claim now. Why not? If it has an economic impact on the business, the employer in theory should be able to reclaim VAT.”

Wilson added that it will depend on the legal and pecuniary responsibilities of the employer within the new UK auto enrolment regulatory framework, and in the legal and economic relationship between the company, pension scheme and the investment.

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