An announcement by HM Revenue & Customs aims to clarify the rules relating to recovery of input tax by employers who provide funded pension schemes for their staff and, in particular, sets out the correct application of the rule commonly known as the 30/70 split. This is to address increasing HM Revenue & Customs (HMRC) concerns that businesses are applying the 30/70 split more generously than is intended and recovering input tax to which they are not entitled. The new arrangements will come into effect from October 1, 2005.
An employer usually establishes a funded pension scheme under a trust deed and, in consequence, the business activities of the fund are separate from those of the employer. Where trustees of a pension fund are carrying on taxable business activities, they are liable or entitled to register for VAT, although they normally have to restrict their input tax deduction because they usually make mainly exempt supplies. HMRC accepts that employers establish pension schemes for business purposes and that VAT on expenditure relating to management, or what can also be termed administration, of the pension scheme is their input tax. Correct attribution of the services between employer and trustees is essential – just as it is in any situation where both exempt and taxable supplies are made.
With new arrangements with effect from October 1, 2005, third parties providing both investment and administration services who are able to determine the actual values of each must provide separate invoices to trustees and employers showing the actual value of services provided. Where third parties are genuinely unable to determine separate values for investment and administration services, HMRC will continue to accept use of the 30/70 split, but only where the third parties are administering the pension scheme fully or providing the bulk of the administration of the scheme.
In all other cases, employers will have to agree a fair and reasonable apportionment with HMRC that is robust, transparent and able to be tested. Where employers consider that the administration work done amounts to more than 30 per cent of the total services provided, they will also have to agree an apportionment with HMRC, but our current enquiries have indicated that the administration element is more often well below 30 per cent.
What does this mean for employers? HMRC will not challenge use of the 30/70 split for invoices received for periods up to and including 30 September 2005. After this date, if HMRC considers that employers have over-recovered input tax, an assessment will be raised to recover this. This means, of course, that any tax over-claimed by employers is proper to the trustees of the fund and may be recovered by them, subject to the normal rules. Any such assessments can be appealed, again subject to the normal rules.
For those providing services in connection with pension schemes, these third parties will need to consider carefully the nature and values of the services they provide and, where possible, issue separate invoices showing the actual value of services provided to trustees on investment work and to employers on administering the scheme. If this is not done, HMRC will want to check with them why they are unable to do so.