VAT recovery options for UK defined benefit pension schemes

Out-Law Analysis | 18 Jan 2018 | 10:38 am | 2 min. read

ANALYSIS: Defined benefit (DB) pension schemes in the UK now have a number of options for VAT recovery available to them following the publication of long-awaited guidance by HM Revenue and Customs (HMRC).

Schemes may continue with their current recovery arrangements after HMRC confirmed that it would not withdraw the '30/70' split used by many, but should be aware that there are other options which may offer increased recovery.

HMRC policy and guidance

HMRC previously allowed employers to recover VAT incurred in relation to occupational pension scheme administration on the basis that there costs were employer overheads. However, HMRC considered that investment management costs related solely to scheme activities, meaning that they were recoverable by the scheme but not the employer.

Where fund managers supplied both general scheme administration and investment management services under a single invoice, HMRC traditionally applied a '30/70 split' which allowed employers to assume 30% of the fees related to administration and to recover VAT paid on those fees. The remaining 70% of the fees were assumed to relate to investment management, and the VAT on those could potentially only be recovered by the trustee (if VAT registered).

HMRC changed its policy following a number of European court decisions. HMRC now allows VAT to be recovered on both administration and investment management costs, provided the employer contracts and pays for the investment services.

However, HMRC's briefings on this raised a number of complications, in particular around the employer's ability to make corporation tax savings. HMRC has struggled to reconcile the European court decisions with pensions and financial services regulations, accounting rules and emerging case law. As a result, schemes were allowed to continue with their existing VAT recovery arrangements for a transitional period, which was due to end on 31 December 2017.

HMRC has now confirmed that schemes can continue to rely on these arrangements. However, additional options are also available.

What the latest guidance means for your scheme

A VAT-registered employer can recover VAT on general scheme administration costs even where the trustee contracts and pays for those services. Trustees must arrange for invoices to be made out by the supplier in the name of the employer, and the employer can use these to deduct VAT.

However, VAT on investment costs can only be deducted by the employer when it contracts with the supplier directly for the services and pays for them itself.

HMRC will continue to recognise VAT recovery using the 30/70 split. This means that schemes should be able to continue with the arrangements they had in place during the transitional period. Employers who do not consider that 30% is a fair proportion to attribute to general administration costs must provide evidence to HMRC to support a different apportionment, or ask suppliers to provide separate invoices apportioning the costs on a fair basis.

Schemes should be aware that there are other methods which might offer a higher rate of recovery. HMRC's updated guidance also covers the use of:

  • tripartite contracts between service providers, trustees and employers;
  • VAT grouping;
  • arrangements where trustees supply scheme administration services to the employer on a VATable basis.

A legal adviser can provide more information on how these arrangements work, and whether they may be suitable for your scheme.

What about occupational DC schemes?

HMRC expects that most occupational defined contribution (DC) schemes will qualify as 'special investment funds' (SIFs). The management services provided to those schemes are VAT-exempt regardless of whether they are investment management or general administration services, and should always have been treated as VAT-exempt.