New guidance on VAT recovery for pension schemes has been put on hold

HMRC’s intended new guidance on the recovery of VAT incurred on defined benefit (DB) pension scheme costs has been delayed.

12 month extension to transition period for new VAT guidance

HMRC has announced a 12 month extension to the transitional period where an employer can deduct VAT paid on services relating to the administration of defined benefit pension schemes and the management of their assets.

The transitional period, which was due to end on 31 December 2016, has now been extended to 31 December 2017.

During this time, employers can continue to recover the VAT incurred in the administration of the scheme (subject to invoices being addressed to it and the normal VAT recovery rules applying), but cannot recover VAT incurred from fund investment services. Where a fund manager provides both administration and investment services, and where these services are included in the same invoice, HMRC will normally allow an employer to recover 30 per cent of VAT incurred on those fees as being related to administration, subject to the normal rules of VAT recovery.

What does this mean for pension schemes that have already changed to the new guidance?

HMRC recognises that some employers and pension funds may have already made changes to their structure and/or contractual arrangements to comply with HMRC’s previous guidance in Revenue and Customs Brief 43/2014. Provided the employer and pension scheme agree to both apply this treatment, HMRC has confirmed that taxpayers may continue with these arrangements.

HMRC has also confirmed that, if they wish to do so, employers and pension schemes can revert back to the previous treatment, outlined above, during the transitional period. 

Why HMRC have extended the transitional period

Trustees of pension schemes and sponsoring employers have been anxiously awaiting further clarification from HMRC on its policy regarding VAT recovery conditions of employers and trustees of DB pension schemes.

It would appear that HMRC has however encountered a number of issues in its attempt to reconcile the PPG Holdings decision, with pension and financial service regulations, accounting rules and the implications of corporate tax deduction.

While we anticipate further guidance from HMRC addressing the various VAT and direct corporate tax issues, we are now unlikely to see this until autumn 2017 at the earliest.

How we can help

Our VAT, Corporate Tax and Pensions teams work collaboratively so the issues and concerns of pension scheme trustees, scheme management and corporate scheme sponsors are addressed.

To discuss any of these matters in more detail, contact Ian Carpenter.