HM Revenue & Customs has set October 1st as the deadline for tightening up its handling of the so-called 30/70 split rule relating to recovery of "input tax" by employers providing funded pension schemes.
HMRC says the clarification has been made as there are concerns businesses are applying the rule more generously than intended and recovering input tax to which they are not entitled.
The 30/70 rule refers to the way VAT, charged by third parties such as fund managers to both employers and trustees of pension funds, is split. Since most employer-provided pension schemes are written in trust, separate to the main business of the employer, HMRC has to ensure correct attribution of services is enforced.
When, for example, fund managers only supply one invoice, HMRC has generally accepted the employer can treat 30% of the VAT charged as "input tax", with the rest attributed to the pension fund, as this VAT is a deductable for tax purposes.
”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 schem is their input tax.”
The 30/70 rule was adopted by HMRC before computerisation, when it was more difficult to attribute the correct VAT charges. However, HMRC says a review of practices adopted revealed even where separate invoices are being issued for management services and services purchased by pension funds, companies are still relying on the 30/70 split.
”In some cases the 30/70 split is even being used where fund mangaers are providing no pension scheme administration services whatsoever to the employer, but are providing services that relate wholly to exploitation of the fund’s assets.”
HMRC goes on to say: “Where employers administer the scheme themselves, or engage specialist pension scheme administrators and in addition separately engage fund managers to provide investment services only, it is clearly inappropriate to attribute 30% of the fund mangers’ charges to the management of the pension scheme. HMRC considers that, in most cases nowadays, fund managers and other professionals are easily able to distinguish the nature of their services and issue separate invoices to employers and trustees, reflecting the actual values of the services provided to each.”
As a result of its review, HMRC says it will cease accepting use of the rule in all cases except those where third parties are administering pension schemes fully or providing the bulk of scheme administration.
After 1 October, HMRC will encourage trustees to recover any tax over-claimed by employers and warns third parties will have to, where possible, provide separate invoices showing the value of work done for trustees and for employers. If separate invoices are not provided, HMRC “will want to check with them why they are unable to do so”.
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