On 23 March 2021, the Irish Revenue Commissioners (“Irish Revenue”) published an update to their Tax and Duty Manual entitled Employer’s Entitlement to Deductibility of VAT Incurred in the Setting Up and Management of a Pension Fund (the “Revised Guidance”).
The Revised Guidance clarifies the circumstances in which an employer can recover input VAT incurred in respect of certain costs in relation to an employee pension fund.
The Revised Guidance can be accessed here.
In practice, difficulties can arise in claiming VAT deductibility for costs incurred in relation to an employee pension fund due to the operation of the regulatory regime to which pension funds must adhere. In particular, the trustees of the pension scheme may be required to contract directly with the service provider or, in some circumstances, enter into a tripartite contact.
In the above circumstances, although the employer may directly pay the service provider, typically, the invoice will be addressed to the trustees of the pension fund (as recipient of the relevant services under the contract). Consequently, the employer will not obtain a valid VAT invoice in its own name and, as such, would not otherwise be entitled to recover the VAT arising on the invoice.
Conditions to be satisfied
The Revised Guidance confirms Irish Revenue’s position that they are prepared to allow the employer to recover the VAT which the employer incurs in respect of costs in relation to the setting up and management of a pension scheme where certain conditions are satisfied (please see further below).
In order for the employer to be entitled to VAT deductibility in these circumstances, all of the following conditions must be satisfied:
(a) the costs of the input transaction form part of the employer’s general costs and, as such, constitute components of the price of the taxable goods or services which the employer supplies;
(b) the employer is responsible for payment of the services that are supplied under the contract and pays the service provider directly;1
(c) the employer is not (either directly or indirectly) reimbursed in respect of the payment of the costs; and
(d) the relevant invoice includes the words “for the account of [name of the employer]”.
Furthermore, the employer and the trustees of the pension fund must 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, as well as a disclaimer by the party not claiming the input VAT credit.
The updates set out in the Revised Guidance represent a welcome clarification to Irish Revenue’s position on when an employer can claim VAT deductibility for costs in relation to the setting up and management of an employee pension fund which might otherwise be irrecoverable due to regulatory requirements. The publication of the Revised Guidance follows engagement with Irish Revenue by relevant industry stakeholders and largely seeks to codify the practice which we understand Irish Revenue have previously operated.