Employers have been dealt a blow after HM Revenue & Customs decided to take a tougher stance than Europe on how much tax firms should pay on pension costs.
It follows a ruling in the European Court of Justice involving Dutch industrial firm PPG and its defined benefit pension fund. The ECJ ruled in June that ‘services relating to the management and operation of that fund’ should be VAT deductible.
UK pensions and tax experts had hoped the ruling would see all VAT costs on DB pensions become recoverable.
But HMRC has now issued a briefing note saying although VAT on administration costs is still recoverable, VAT on investment costs should be non-recoverable.
Under current VAT treatment a rule of thumb allows 30 per cent of the VAT bill to be recovered by the employer as management costs, with the remaining 70 per cent defined as non-recoverable investment costs.
That rule of thumb is also being removed meaning employers will have to spend more time calculating what proportion of its VAT bill should be recoverable.
Law firm Pinsent Masons partner Darren Mellor-Clark says: “HMRC has taken a very restricted view and is blocking any opportunity to use this decision to take the sting out of VAT costs for pensions funds.”
An upcoming case involving Dutch DC pension provider ATP will decide whether or not charges incurred by defined contribution schemes should also be lifted out of VAT.
Yellowtail Financial Planning managing director Dennis Hall says: “This just highlights how complicated the VAT issue is for financial services.”