HMRC has announced that it is extending the transitional period for reclaiming VAT to 31 December 2017. This maintains its longstanding practice of allowing employers to treat VAT on certain pension costs as input tax for VAT purposes, meaning it can be offset against the employer's own VAT bill.

Background

Following the decision of the Court of Justice of the European Union in the "PPG case", HMRC announced in February 2014 that it was ending its existing practice of allowing employers to offset VAT paid on certain pension costs against their own VAT liability, where the pension costs were technically incurred by the scheme trustees. The change was subject to a transitional period.

HMRC's February 2014 announcement was very unclear. Although there have been various subsequent announcements seeking to clarify the consequences of HMRC's change of policy, these have thrown up numerous legal issues. The transitional period during which the old practice can be maintained has already been extended several times.

Today's announcement

Today's announcement says that it is taking longer than expected to reconcile the court decision in the PPG case with pension and financial service regulations, accounting rules and emerging case law, which is why the decision has been taken to extend the transitional period to 31 December 2017. The announcement says, "Some taxpayers may have already made changes to their structure and/or contractual arrangements to comply with the judgment. Provided the employer and pension scheme trustees agree and both apply the same treatment, these taxpayers may continue with those arrangements. If they wish, they may choose to revert back to the previous treatment during the transitional period."

The announcement states that the guidance HMRC had been intending to publish has been put on hold whilst HMRC considers the wider implications of the options being proposed. Today's announcement already contemplates the possibility of a further extension to the transitional period, stating that towards the end of 2017, HMRC will review the position and "consider the need for a further extension if necessary".