Of interest to all schemes is the publication by HMRC, on 25 November 2014, of its revised policy on the circumstances in which supplies of pension fund management services qualify for VAT exemption and the extent to which employers may deduct input VAT incurred on pension fund administration and investment management costs.

The policy briefs

On 25 November 2014, HMRC published two briefs following the decisions of the Court of Justice of the European Union (CJEU) in the European cases of ATP Pension Services and PPG Holdings.

Brief 44 (2014): VAT treatment of pension fund management services confirms that administration, including fund management, services provided to DC schemes are generally exempt from VAT and UK legislation will be amended to reflect this. HMRC accepts that pension funds with the following characteristics are special investment funds (SIFs) under European law:

  • they are solely funded (directly or indirectly) by those that will receive the retirement benefits to be paid (beneficiaries);
  • the beneficiaries bear the investment risk;
  • the fund contains the pooled contributions of several beneficiaries; and
  • the risk borne by beneficiaries is spread over a range of securities.

Brief 43 (2014): VAT on pension fund management costs confirms that HMRC now accepts that there is no distinction for VAT purposes between administration and investment management services. HMRC has confirmed the withdrawal of the 70/30 split arrangement, but has extended the transitional period to 31 December 2015.

However, HMRC stresses that input tax deduction will be available only if the employer is the recipient of the supply and will not accept input tax claims unless the employer is a party to the contract for the services concerned and it has paid for them. Employers that have applied the 70/30 split may make a claim for under-declared input tax subject to a four-year cap.


For DB schemes, services agreements between the employer, trustees and the service provider will need to make clear that the employer benefits from, and pays for, the services. The VAT invoice must also be addressed to the employer.

The extension until 31 December 2015 of the transitional period for the withdrawal of the 70/30 split appears generous but employers will need this time to allow for the restructure of agreements to ensure they are the recipients of supplies on which they seek to recover VAT. Accordingly, existing agreements may need to be amended and employers should seek advice on how best to optimise their VAT position.

For DC schemes, HMRC’s acceptance that UK VAT law must be amended to reflect the CJEU’s ruling in the ATP case is welcome. However, schemes may require advice in interpreting HMRC’s criteria to benefit from the SIF exemption from VAT.

In relation to both DC and DB schemes, the circumstances in which backdated claims for overpaid VAT may be made may not always be easily identifiable, and again, schemes should seek tax advice where necessary.
The new HMRC guidance will be examined in depth in a future addition of our monthly pension briefing.