New Irish Revenue guidance clarifies rules on VAT treatment of establishing and managing pension schemes

VAT deductibility - Conditions to be met

In order for an employer to recover VAT incurred in the establishment, ongoing management, administration and management of the assets of a pension scheme, the following conditions must be met:

• The costs form part of the employer’s general costs and are included in the price of the taxable goods or services it supplies and/or its qualifying activities.
• The costs incurred are invoiced to, and paid by, the employer and not passed on to the pension scheme.
• There is a direct and immediate link with the employer’s economic activity, and in particular, its taxable activity and/or its qualifying activities.

Tripartite agreements

The trustees of a pension scheme may contract with a service provider directly. Alternatively, the trustees may enter into a tripartite agreement with the service provider and the employer  whereby invoices are made out in the name of the trustees. In such cases, Irish Revenue has clarified that the employer may recover VAT on service provider costs paid by it provided that:

• The costs form part of the employer’s general costs and, as such, are components of the price of the taxable goods or services it supplies and/or its qualifying activities.
• The employer is responsible for payment of the services, even if the invoice is addressed to the pension scheme trustees and the employer pays the service provider directly. This arrangement should be demonstrated by way of a written agreement between the employer and the trustees.
• The employer is not reimbursed, whether directly or indirectly, in respect of payment of the costs.
• The invoice includes the words “for the account of [name of the employer]”.
• The employer and pension scheme trustees ensure there are clear controls in place to verify that there is an entitlement to recover the input VAT in respect of the costs incurred and a disclaimer by the party not claiming the input credit.

Reimbursement

Where an employer receives taxable services and makes an onward supply of those services to the pension scheme for consideration, the employer must charge VAT on that supply. The employer may be entitled to a VAT deduction in respect of VAT incurred by it, subject to the satisfaction of the conditions outlined above. However, if the pension scheme trustees contract for and receive services and the employer reimburses the scheme by making an additional contribution to cover the costs, that contribution will be outside the scope of VAT. This means that the employer will not be entitled to VAT deductibility in respect of the payment made to the trustees.

VAT treatment of defined benefit and defined contribution pension schemes

Additional guidance issued by the Revenue provides clarification on the VAT treatment of defined contribution (“DC”) and defined benefit (“DB”) pension schemes. This guidance can be accessed here.

The guidance provides that the management of a pension scheme is VAT exempt if it qualifies as a Special Investment Fund. Management in this context includes investment management, administration and marketing. Management services such as the opening of accounts in the pension scheme’s system and crediting contributions paid to those accounts which are essential to the management of a Special Investment Fund are VAT exempt in Irish Revenue’s view.

In order to qualify as a Special Investment Fund, a pension scheme must:

• Be funded by the persons to whom the retirement benefit is to be paid.
• Invest savings using a risk spreading principle.
• Lay the investment risk on the pensioner.

Only a defined contribution scheme can qualify as a Special Investment Fund for these reasons.

DB pension schemes are not Special Investment Funds and are generally subject to VAT at the standard rate for management services. This would include the likes of analysing and monitoring investor assets as well as purchasing and selling securities. However, where a service provider charges fees to a DB pension scheme strictly for the purchase or sale of shares or securities on a transaction-by-transaction basis, such fees may be exempt from VAT to the extent that the services in question constitute portfolio management services.

Comment

The above guidance by the Revenue codifies and clarifies a number of long standing principles regarding the VAT treatment of pension schemes. It is helpful guidance which should be followed by both employers and trustees in order to optimise the VAT treatment of the pension scheme.