The HMRC policy on deduction of VAT on costs relating to investment management activities of an occupation pension scheme has altered with effect from 3 February 2014.  The HMRC has confirmed that a pension scheme employer may be entitled to deduct VAT paid on services relating to the administration of its pension scheme and management of assets of the pension fund.

Existing HMRC policy has been to distinguish between costs incurred in relation to the set up and day to day administration of occupational pension funds and management of investment activities.  HMRC previously allowed employers to deduct VAT for general administration on the basis that these were overheads and had an immediate and direct link to an employer’s business activities.  Investment management costs were deemed to be costs of the fund itself and to relate solely to the activities of that fund.  If deductible at all, they were deductible by the fund and/or the trustees.

In a case heard by the ECJ – PPG Holdings BV it was established that VAT charged on management services provided to a pension scheme could be deducted by the employer which had set up the scheme and paid for services.  There did, however, have to be a direct link between the services and the employer’s business.

The change to the HMRC’s policy will mean that employers may be able to claim input tax in relation to pension funds where they could not previously.

The HMRC has made it clear that it will not accept that the VAT incurred is deductible by an employer where:

  • supplies were not made to the employer; and
  • supply is limited to investment management services only.

If the pension fund itself has paid for the cost of the services the HMRC will require an equivalent amount of output  of VAT in respect of the amounts reimbursed to be accounted for.  This is potentially deductible by the fund to the extent that it is engaged in taxable business activities.

At this stage we would recommend that employers, schemes and their administrators consider the impact of this alteration in order that the necessary steps can be put in place to ensure that the VAT position is correctly reflected and claimed within the scheme.