10 December 2018 - Article
There has been much comment in respect of a decision by the CJEU to the effect that a business may reclaim VAT on costs incurred in respect of an occupational pension scheme for its workers, and that this might present a significant opportunity for charities and others alike (C-26/12 – PPG Holdings BV).
It should be borne in mind, first, that even if a cost is regarded as one that relates to a charity’s business as a whole, the VAT will not be recoverable simply by virtue of that fact, but will only be recoverable to the extent that overhead costs are recoverable in any case. This means that a charity with a low rate of general recovery would not, under any interpretation, be able to reclaim a large amount of VAT. This is of interest, therefore, to charities with reasonably high levels of taxable supplies which thus enjoy a high rate of recovery.
In any case, HMRC has for several decades operated a rule whereby a significant proportion of the costs of an occupational pension scheme, when charged to the employer, qualify for VAT recovery. In basic terms, the administration of the pension scheme has been regarded as an employer cost and thus recoverable, whereas the investment costs of the scheme, even if paid by the employer, have been regarded as pension fund costs and the VAT could not be recovered. The issue that has arisen from this recent case is that the CJEU did not make any particular distinction between administration costs and investment costs. Whilst the matter is far from as clear as would be ideal, this appears to open the prospect of being able to reclaim VAT that has not been claimed in the past on the investment cost part of the charges, potentially with interest. However, there are some important caveats.
Under the traditional arrangement accepted by HMRC, it has in fact been possible for the administrative costs to be reclaimed by an employer, even if the net cost is then onward charged to the pension fund. In other words, the economic cost of the administration need not have fallen ultimately on the employer, but he could still recover the VAT. The reason for this is shrouded in history, and there has been some recent commentary to the effect that it is either wrong that the employer in that position can reclaim any VAT at all, or alternatively, he should have charged the VAT to the pension fund which the pension fund would not recover. It is clear from the facts of the present case, that the employer had not recharged any of the costs to the pension fund. Indeed, that was one of the main arguments for it not being allowed to reclaim VAT, namely that it had not made a VAT bearing supply to the fund. The CJEU also commented that the VAT was recoverable only because it had a direct and immediate link with the actual supplies made by the employer company. As part of that discussion, the CJEU pointed out that the costs of providing the pensions had to form ‘components of the price of the goods or services he supplied’. Clearly, it is not possible to say that the costs form any such components of the services if they are ultimately avoided by being recharged to the pension fund. They do not, therefore, affect the company’s bottom line. From this it can be inferred that where the costs have been passed to the pension fund, there is a material difference to the circumstances of this particular case, and it is not clear that HMRC would be obliged to reimburse VAT on investment costs that had been passed on in such a manner.
However, in this state of uncertainty, and it should be possible to make a protective claim to HMRC to await their general view on the matter.