Policy paper

Revenue and Customs Brief 9 (2013): treatment of 'consultancy charges' for services supplied to employers

Published 17 April 2013

Purpose of this brief

This brief confirms the VAT implications of regulatory changes that will affect the way that Employee Benefit Consultants (‘EBCs’) and others providing services to employers for the setting up and administration of work place contract-based pensions will be remunerated in the future.

Services supplied to employers or Trustees in respect of occupational pension schemes held through trusts are not covered by thibrief.

Who needs to read this?

• businesses (such as EBCs) that advise and assist employers and/or employees in connection with contract-based Group Personal Pension plans
• employers that receive these services

Action to take

Businesses supplying the above services need to establish the following to determine the VAT treatment:

• what is the precise nature of the service supplied, and
• who is the recipient of that service?

Businesses that advise and assist employers in relation to the setting up and/or ongoing administration of Group Personal Pensions should charge standard rated VAT to employers on services provided to them in return for ‘consultancy charges’ or other fees.

Employers should be aware that they will normally be able to recover the VAT that is charged to them on these services as input tax, subject to partial exemption and input tax rules (further information in paragraph 1.4 below).

The VAT treatment of services provided to employees will depend upon the nature of the services provided (further guidance can be found in the VATFIN and VATINS guidance manuals). Services to employees, even if paid for by the employer, will not generally attract input tax recovery.

Background

Employers may seek advice and assistance from EBCs and other pension consultants on the setting up of and/or ongoing administration of workplace personal pensions. This market includes group personal pensions, group stakeholder pensions and group self-invested personal pensions – collectively referred to as GPP schemes.

Although some pension consultants have charged employers for such services (including advice and services provided to the employer’s staff) in the past, it appears to have been more common for them to make no charge for these services, but to rely instead on commission paid by the pension provider.

As a result of the Financial Services Authority’s (FSA’s) Retail Distribution Review (‘RDR’), EBCs and other pensions consultants have been banned from receiving commission based remuneration with effect from 1 January 2013 (subject to exceptions under transitional arrangements for clients engaged before this date). These businesses are now required to agree ‘consultancy charges’ with the employer instead, which may in some cases be supplemented by separate fees charged directly to the employer.

Analysis of VAT liability

In order to fall within the finance or insurance exemptions, it is necessary for the provider to act as an intermediary (or one of the intermediaries) between the individual employees and the pension provider with a view to the conclusion of an individual pensions contract.

Based on the typical contractual arrangements reviewed by HM Revenue and Customs (HMRC) and its discussions with the pension consultants industry this does not appear to be the position in respect of the services currently provided by pension consultants in return for ‘consultancy charges’. On the contrary, the ‘consultancy charge’ is a fee paid in return for advisory, administration and other services supplied to the employer. The fact that the (net of VAT) ‘consultancy charges’ are paid via the pension provider does not alter the VAT analysis. The same VAT analysis also applies to any separate fees charged to employers.

EBCs and other pensions consultants should therefore account for standard rated VAT on ‘consultancy charges’ and any separate fees charged to employers for these services.

HMRC understand the future use of consultancy charging is still under review and the position could change going forwards. If, therefore, the nature of the services remunerated by consultancy charges changes in future and it can be demonstrated those services meet the conditions for VAT exemption outlined above, any charges made for the provision of those services will be VAT exempt.

Invoicing arrangements

Consultancy charges are consideration for supplies of services by the pension consultant to the employer in respect of which the employer is liable to pay any VAT due. The pensions consultant is therefore required to provide a VAT invoice to the employer for taxable services provided to them that are remunerated by way of ‘consultancy charges’. This is the case even though, in practice, the consultant will not receive the net charges from the employer but from the pension provider, who will deduct the charges from contributions and/or members’ funds and remit them to the consultant.

Employers’ entitlement to recover input tax

The VAT incurred on consultancy charges and other fees charged by EBCs and other pensions consultants in connection with the setting up and administration of corporate pension schemes will be recoverable as input tax by VAT registered employers that incur the costs in the course or furtherance of their business, subject to any necessary input tax restrictions.

If an employer makes exempt supplies, the amount of input tax that can be deducted may be restricted as, normally, input tax can only be deducted if it relates to taxable supplies. Further information on this is in Notice 706 Partial exemption.

Issued 17 April 2013