New HMRC Guidance on Employer’s Entitlement to Deduct VAT on Pension Scheme Administration and Management of Assets

HMRC have issued Revenue & Customs brief 14 (2016) regarding an employer’s entitlement to deduct VAT on services relating to the administration of defined benefit pension schemes and the management of their assets.

This brief extends the transitional period for a further 12 months until 31 December 2017.  This is due to the complexities of the interaction of VAT, pension and financial service regulations.

Calculating VAT

For more information please contact our Senior
VAT Manager, Alison Birch, on 0161 817 6100 or
send her an email.

By way of background, PPG, a Dutch company, established defined benefit pension schemes for its employees and received supplies of services relating to the administration of the scheme and investment management of the assets.  It paid the cost of these services and did not pass the costs on to the pension fund.

The CJEU (Court of Justice of the European Union) decided that PPG was entitled to deduct the VAT incurred provided that there was a direct and immediate link between the services and its own taxable supplies.

In the UK, HMRC’s policy has been to distinguish between costs incurred in relation to:

  • The setting up and day to day administration of occupational pension schemes; and
  • The investment management relating to the assets of occupational pension schemes

HMRC allowed employers to deduct VAT incurred in relation to the administration of an occupational pension scheme but in contrast considered that investment management costs related solely to the activities of the pension scheme.

Where a single invoice was received covering both the administration of the pension scheme and the management of the investments,  HMRC allowed the employer to claim 30% of the VAT as relating to the administration of the scheme and the pension scheme to claim 70% as relating to the investment management as an administrative simplification.

Following PPG, HMRC is changing its policy on the recovery of input tax in relation to the management of pension schemes and has withdrawn the administrative simplification (70:30 split mentioned above) on the basis the employer will potentially be able to deduct input tax if it receives the supply of services.  However please note that the simplification can still be used during the transitional period and this is what has been extended until 31 December 2017.

The first step in deciding whether the VAT on services may be deductible by an employer is by determining whether the services in question are supplied to the employer.  In the case of occupational pension schemes, there are normally two potential recipients of the supplies: the employer and the pension scheme through its trustees.

A fundamental point to be considered is economic reality and the agreements should be examined.  Whilst payment is an important factor in who is the recipient of a supply it is not decisive.  HMRC will not accept that the VAT incurred in relation to a pension scheme is deductible by an employer unless there is contemporaneous evidence that the services are provided to the employer and the employer is a party to the contract for those services and has paid for them.

A valid VAT invoice will be required to support input VAT deduction and any input VAT restrictions the business has (e.g. non business or partial exemption) will need to be considered as the costs will be an overhead of the business.  If an employer receives a taxable supply of administration and investment management services and recharges them to the pension scheme, that recharge is consideration for an onward taxable supply and VAT is due accordingly.

Some businesses have already made changes to their arrangements and HMRC are allowing these businesses to continue with their arrangements or revert back to the previous treatment.  HMRC will publish the different options for VAT recovery once they have considered all the implications – in particular regulatory requirements and Corporation Tax deductions.

If you have a defined benefit scheme and would like to discuss this further please contact our Senior VAT Manager, Alison Birch, on 0161 817 6100 or

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