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HMRC may rethink ‘narrow’ interpretation of pensions VAT ruling

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The UK tax office, HM Revenue & Customs (HMRC), could offer scheme sponsors a VAT lifeline, as updated guidance on its interpretations of recent European rulings will be issued later this year.

The move from HMRC comes after recent victories for two separate entities against their own domestic tax departments regarding the charging of VAT on pension scheme services.

In the Netherlands, PPG, an employer, won its case in the European Court of Justice (ECJ) against the Dutch tax authority over whether the investment management fees it pays on behalf of its defined benefit (DB) schemes should be tax exempt.

A ruling regarding Danish pensions services provider ATP, on behalf of its client PensionDanmark, followed this.

ATP argued it should not have to charge VAT on its services provided to defined contribution (DC) schemes clients, as these schemes are special investment vehicles, with the ECJ agreeing.

Both rulings had implications for UK sponsors, DB schemes and DC schemes with regard to VAT treatment for both investment and adminstration costs.

However, HMRC did not mimic the PPG ruling regarding scheme sponsors and instead changed its guidance, potentially increasing the tax bill for some sponsors

In an update to schemes, the tax office has now said it will issue updated guidance regarding its interpretation of the ATP victory, and also the PPG case.

A reassessment of its initial stance could result in scheme sponsors facing a reduction in the tax bill stemming from its DB scheme.

A statement from HMRC said the body held extensive discussions with industry representatives regarding its policy on the PPG case.

“In addition to this, the ECJ has issued its decision in ATP,” it said. “HMRC is now further reviewing the VAT treatment of pension scheme administration and fund management services to take account of both the PPG and ATP decisions and to consider whether to make any changes to the guidance.”

A spokesman for HMRC said the body could not currently say whether the review would result in a more positive stance for sponsors.

However, David Wilson, associate director for VAT at accountancy firm Baker Tilly, said the feedback HMRC received on its interpretation of the PPG ruling was that it was overly restrictive, and not following the spirit of the case.

“[HMRC] may be taking a step back and thinking about what it needs to do,” he said.

“This was followed by the ATP ruling, and it is just going to have to look at the whole scenario about how it impacts pension funds and how these funds are set up in the UK.

“I would assume the industry would have been back to HMRC and questioned the differences between VAT law in the European Union and HMRC.”

The recent changes to the DC landscape, outside of any VAT case in Europe, will have significant implications for direct tax on DC savers, and thus government revenue, he added. 

“It will have to re-think its positions as a result of the ATP judgment,” he said.

“Hopefully, we will have some joined-up thinking for how it approaches DC schemes and auto-enrolment going forward and get one desk talking to another.”

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