Loss of VAT exemption for pension fund management costs

From 1 April 2019, regulated insurance companies will no longer be able to exempt their fund management services, when these are provided to a pension fund scheme that is not a special investment fund (SIF).

Background

HMRC has previously allowed all pension fund management services provided by regulated insurance companies to be exempt from VAT. Those provided by non-insurers have not been able to benefit from exemption. This was because of a ruling by the European Court of Justice, which had previously determined that occupational defined contribution pension schemes qualified as a special investment fund (SIF), and so qualified for a VAT exemption on fund management services.

However, there have been a number of court cases regarding whether this exemption could also be applied to occupational defined benefit schemes. HMRC announced in 2017 that its policy to treat these services to defined benefit schemes as VAT exempt insurance would be discontinued from 1 April 2019.

The current High Court decision in the ongoing case of United Biscuits supports HMRC’s treatment. However, United Biscuits have appealed the High Court decision that their services fall outside the scope of exemption and the case is being heard in February 2019. If the High Court decision is overturned, it raises the possibility that in future, there could be further changes to the UK VAT treatment of pension fund management costs. 

Impact

This could be a significant change for a number of insured defined benefit schemes who are currently benefiting from this VAT exemption, with the concern the additional VAT charge of 20% will be passed on in full to schemes where contracts permit. Where investment management contracts are held through insured vehicles, the additional VAT charge could be considerable.

Exemption is still expected to apply for pension fund management services provided to ‘pooled mandates’. 

In addition, services provided by insurers under contracts of insurance will continue to benefit from the insurance exemption.

What to do

Defined benefit schemes are encouraged to review their arrangements to establish which providers may be taking advantage of this insurance exemption, and to consider whether or not to approach their provider to understand how they intend to manage this change. Specifically, whether the provider will pass the additional VAT cost onto the scheme which may affect internal budgeting. 

Where VAT will be charged from 1 April 2019, then it may be possible for the new rules to be applied regarding the employer’s ability to recover VAT. If the employer can be a party to the contract with the provider then it may be able to recover the VAT in full.

Whilst this may provide a solution for some schemes and employers, it will depend on the specific circumstances, so it is important that advice is taken.