HMRC has today announced that the transitional period for deducting VAT on pension scheme costs has been extended to 31 December 2017. It has confirmed that:

  • Trustees and employers may continue to use previous arrangements, which allow the employer to reclaim VAT on administration (but not investment) costs incurred by the trustees. Where a contract provides for both administration and investment services, 30% of the costs may be deemed to cover administration and VAT may be recovered.
  • Schemes whose VAT arrangements have already been changed in response to previous HMRC briefs may continue to use the new arrangements, provided the trustees and employer agree. They may also switch back to the previous VAT treatment (including the 30/70 administration/investment split) if they so wish.


Historically, HMRC divided the services received by occupational pension schemes into:

  • Administration services; and
  • Investment services.

HMRC allowed sponsoring employers of pension schemes to recover VAT on administration services but not on investment services. Where services straddled both, it allowed a split of 70/30 (where 30% of the invoice was attributed to "administration" and VAT could, therefore, be recovered on that part). The 2013 decision of the Court of Justice of the European Union in PPG Holdings forced HMRC to rethink its position. HMRC subsequently issued a number of Revenue and Customs Briefs that set out its interpretation of PPG and how it should be applied to UK pension schemes.

Employers and trustees were initially given until 31 December 2015 to comply with the new requirements – this was subsequently extended to the end of 2016.

Following PPG, various "solutions" have been proposed to allow sponsoring employers of defined benefit (DB) schemes to continue to reclaim VAT in respect of administration costs and, as far as possible, to reclaim VAT on investment costs as well. However, in-depth consideration of these "solutions" has thrown up further issues in other areas, including corporation tax and financial services regulation. The pension industry had hoped for clarification of these issues from HMRC earlier this summer – but HMRC has now confirmed that the guidance has been put on hold while these solutions are explored further.


Without final guidance from HMRC, meeting the 31 December 2016 deadline for adopting new arrangements was looking increasingly difficult. Extending the transitional period for a further year is therefore a pragmatic and very welcome response from HMRC.