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HMRC internal manual

VAT Input Tax

Specific issues: attribution of services received in connection with funded occupational pension schemes following CJEU judgement in PGG - use of tripartite contracts

A tripartite contract between a supplier, pension scheme trustee and employer may be used to meet the requirement that an employer contracts for investment services outlined in VIT44700 in order to deduct the VAT incurred on those services. This will be subject to the contract meeting the requirements set out below and the services must relate to a defined benefit (DB) pension scheme. This only applies in the context of DB pension schemes because the regulatory regime requires such schemes to be established under a trust and it is the employer that ultimately bears the financial risks and benefits associated with the performance of the scheme. It does not therefore apply where the contract relates to services provided to a defined contribution scheme (DC) because the employer does not bear the same level of financial risks/benefits associated with the performance of the fund.  However many costs incurred in relation to DC schemes will be exempt [please see VATFIN5120 for further information on this].  

Given the unique nature of these DB pension arrangements HMRC accept that both the trustees and the employer are potential recipients of services relating to the management of the pension scheme.  Accordingly, the person who contracts and pays for the services are important factors in determining the recipient of the supply.  An employer may therefore be able to deduct VAT incurred on these services in line with its residual recovery position where, as a minimum, the tripartite contract with the service provider evidences that:

  • the service provider makes supplies to the employer (albeit that the contract may recognise that, in the particular regulatory context in which DB schemes operate, the service provider may be appointed by, or on behalf of, the pension scheme trustees)
  • the employer directly pays for the services that are supplied under the contract
  • the service provider will pursue the employer for payment and only in circumstances where the employer is unlikely to pay (for example, because it has gone into administration) will it recover its fees from the scheme’s funds or the pension scheme trustees
  • both the employer and the pension scheme trustees are entitled to seek legal redress in the event of breach of contract, albeit that the liability of the service provider need not be any greater than if the contract were with the pension scheme trustees alone and any restitution, indemnity or settlement payments for which the service provider becomes liable may be payable in whole to the pension scheme trustees for the benefit of the pension scheme (for example in circumstances where the scheme is not fully funded)
  • the service provider will provide any service related reports, such as fund performance reports, to the employer on request (subject to the pension scheme trustees being able to stipulate that reports are withheld, for example where there could be a conflict of interest)
  • the employer is entitled to terminate the contract, although that may be subject to a condition that they should not do so without the pension scheme trustees prior written consent (this can be in addition to any right that the pension scheme trustees may have to terminate the contract unilaterally)

In addition to the above, evidence that the pension scheme trustees agree that it is the employer who is entitled to deduct any VAT incurred on the services will reduce the potential for disputes.

For a taxable person to be able to deduct any VAT, it will be necessary for them to be issued with a valid VAT invoice for the full cost of the supply and to pay the service provider directly. HMRC do not accept that an equivalent increase in contributions to the fund or any payment that is made by, or through, the fund constitutes payment by the employer.

Changes in the recipient of an investment manager’s services may have regulatory implications. This arrangement may also have implications for an employer’s Corporation Tax deduction, in that where an employer pays directly for investment services, relating to the assets of the scheme, under a tripartite contract HMRC’s view is that in the majority of cases the employer is not entitled to a Corporation Tax Deduction as a consequence of how such costs are treated under accounting standards.

A tripartite contract will not be appropriate for some supplies.  In particular, where there would be a conflict of interest if the employer contracted for the services.  Examples include audit, actuarial and some legal costs of the trustees.