While the majority of pension schemes do not expect to pay tax, the reality is that many pay sizeable amounts in the form of withholding taxes, VAT, stamp duties and even income tax.
Tax efficient investments
A tax liability can arise even in the respect of simple investments. However, as pension schemes increasingly invest in those assets with the potential for higher returns (such as venture capital funds, hedge funds and derivative contracts), there is an even greater potential for tax liabilities to arise. As a result, tax in pension schemes should not be overlooked as it can provide a very practical means of boosting scheme returns, benefiting companies, pension trustees and scheme members. We can help companies review their pension scheme arrangements and identify areas where tax exposures have arisen directly or indirectly. Once this cost has been identified, we can help companies implement solutions to ensure the tax cost is minimised.
As well as ensuring pensions schemes structure their investments as efficiently as possible, we can also assist with an opportunity to recover tax following recent legal cases in front of the European Court of Justice (ECJ). These cases have held that the imposition of withholding tax on cross border dividends is contrary to EU law. In 2009, the Dutch Tax Authorities decided to make tax repayments following this ruling, and a significant number of UK pension schemes have since received refunds after submitting reclaims.
As a result of the ECJ cases, the EU commission has launched legal proceedings against certain Member States to force them to change their domestic withholding tax rules. In many cases it is anticipated that other jurisdictions may start to accept the reclaims that have been filed by pension funds.
We can help companies make all relevant reclaim applications to maximise the opportunity to recover withholding tax imposed on EU equity investments. Not only will such claims enhance fund value, but they could also increase investment returns and improve liquidity.
Deloitte’s Pensions Tax Risk Manager
The cost of providing defined benefit pensions has soared in recent years due to market volatility, increased life expectancy and legislative changes. The increased cost of funding defined benefit pensions means companies are considering a range of strategies to deal with pensions obligations.
When considering the options available to them, companies are looking at how much risk pension schemes pose to the businesses, and how much risk is acceptable. Are their pension schemes being managed efficiently from a tax and governance perspective?
The structure of investments (including third party manager vehicles) can have a significant impact on the tax efficiency – and tax leakage is often not easily visible. Trustees should ensure that they have fully reviewed any structure before committing funds. Pension funds may also suffer withholding tax on direct investment into overseas equities that they could be in a position to recover.
At the same time, trustees need to ensure that they put in place adequate processes to deal with constantly evolving compliance obligations – both in the UK and further afield.
Many pension funds are responding to an increasingly challenging external environment by strengthening their tax control frameworks and related risk management processes. In response to this climate of uncertainty, Deloitte has developed the Pensions Tax Risk Manager, a tool to enable pension funds to take control over how they can assess and improve local and global tax risk management.
The key risk areas encountered by schemes and best practice in mitigating these risks, include:
- Governance and tax risk management - Consistent and complete set of policies and procedures are regularly maintained
- Current investment - Regular, structures reviews undertaken by appropriately supported internal/external teams
- Future investment - Specific reviews of investments and their surrounding management
- Compliance - Active workflow management of filing and payment obligations, central oversight and control
- VAT and PAYE - Mitigation of costs and adequate controls in place to ensure minimal risk of error
The Pensions Tax Risk Manager is complimentary and acts as the first stage in enabling schemes to understand the level of tax risk across invested assets and the embedded tax risk within their approach to investments. Armed with this information, the scheme can consider ways to mitigate any potential tax risks. Please contact the Pensions Advisory team if you would like to learn more.
SMART Pensions enables employers and employees to obtain National Insurance relief for employees’ pension contributions by restructuring the way contributions are made. The savings can be substantial and with auto enrolment on the horizon such savings are invaluable!
The most important factor determining the level of savings is the amount of employees’ regular pension contributions. This will depend of the number of employees who are members of the pension scheme and the level of employee contribution.
We have extensive experience of working with companies to achieve these valuable savings, whilst continuing to support the need for pension saving. Our approach includes an initial workshop with key personnel and discusses key issues including tax and system requirements, protection of pension and other benefits and developing a successful communications programme.
Pension funds pay VAT on a wide range of the services they buy in. The largest VAT amounts tend to be on fund management services, although funds will typically receive a range of other services which carry VAT, including professional advice. Given most funds’ low-to-nil levels of VAT recovery, the majority of this VAT is likely to be irrecoverable – and hence an absolute cost to the scheme as a whole. Therefore, any opportunity to mitigate this VAT offers the potential for immediate savings. The amounts involved can be very significant.
We can help from two angles. Firstly, we can help to ensure that schemes are structured in such a way as to minimise the VAT that is charged to the fund. This will include taking advantage of all current VAT exemptions, together with ensuring that all relevant “protective” claims have been submitted in situations where the VAT treatment of services is in dispute.
Secondly, we can help to ensure that pension funds (and, where relevant, employers) have implemented all possible solutions to maximise recovery of the VAT that they do incur. There are opportunities to do this prospectively, to achieve VAT savings for future periods. There are also opportunities to make retrospective claims for VAT incurred in prior periods.
Employee reward and flexible benefits
One way to tie everything together is under the umbrella of a Flexible Benefit programme. By creating one portal and brand, employees can understand their benefits better as they are referred to in a common language, found in a common location. Further, there is an opportunity to tie several SMART benefits together, saving administration time through increased efficiency.
We can help you design and implement a successful programme which encompasses your pension, ancillary and other benefits that align to your organisational and cultural needs. Through effective and proven communication practices, we will not only ensure that your messages are compliant with HMRC but that they resonant and engage your employees.