New pension fund VAT recovery rules require attention from trustees and employers

Bryn Reynolds, tax expert, and Mark Baker, pensions law expert, at Pinsent Masons, were commenting following HM Revenue and Customs’ (HMRC) announcement, sparking a policy shift.

Baker said: “HMRC’s announcement looks like good news for employers as it suggests they can reclaim all the VAT on fund management services. That’s without the complication of worrying about VAT grouping or setting the trustees up as a service provider to the employer. The policy reflects that, one way or another, most employers are responsible for funding their pension scheme costs. It’s a pragmatic move that reduces administrative overhead and many employers will be very pleased.”

“Employers and trustees should check their contractual and invoicing arrangements, to make sure they can recover their input VAT under this new policy. We’d also like more technical clarity from HMRC: particularly because the announcement doesn’t clearly state whether the ‘70/30’ split, which many schemes previously used, can now fall away,” he said.

Under the new rules, employers are permitted to reclaim the full amount of VAT incurred on investment management services related to occupational pension schemes. This is a departure from HMRC’s original position under which employers could recover input tax incurred on the costs borne administering their occupational pension funds but could not recover input tax on the asset management of investments that were made by the pension fund itself.

After a Court of Justice of the EU (CJEU) decision in 2014, in which it ruled that employers were, in certain circumstances, entitled to deduct VAT on the investment services, HMRC changed its policy to allow deduction. HMRC’s position had been that where a trustee incurs the management fees and makes an onward supply of administration services, they should be splitting the input VAT on investment costs between the trustee's investment activity and its supply of administration services to the employer. Alternatively, where a trustee is VAT grouped with the employer, HMRC argued that they should be splitting the input VAT on investment costs between investment activity and the wider business activities of the employer. 

Under HMRC’s new policy, however, all the input tax associated with these investment costs will be treated as attributable to the employer and therefore deductible by the employer as input VAT, provided normal VAT recovery rules are followed. 

In addition, HMRC will also accept that costs incurred by the trustee in supplying pension fund management services to an employer will be deductible input tax for the trustee, provided they are VAT registered.

The update also suggest that retrospective claims for the last four years might be possible, although again no details are given.  

Reynolds said: “This is a welcome clarification from HMRC, but it’s not a free pass. Employers must still ensure that their VAT recovery is properly substantiated. The move away from the dual-use model can increase VAT recovery on costs but may make compliance more complex. Errors in documentation or misunderstanding of the rules could still lead to disallowed claims and potential penalties. The more detailed practical guidance to be issued by the autumn will be key.”