Recovering VAT on the cost of advice and other services in relation to an occupational pension scheme is likely to be more difficult in future. In the longer term, however, it may be that steps can be taken to improve recovery.

This is the result of HMRC’s changed position following the PPG case at the CJEU.

All types of occupational pension scheme – DB, DC, hybrid and cash balance, for example – are affected. The biggest impact will be on schemes with DB benefits because of the volume of services they need.

Now the basic test for recovery is whether the service is supplied to the employer. It is the same test for all services: in particular, investment management is treated the same way as other services.

It might be possible to rearrange the supply of services to improve recovery, though this is likely to be easier with some services than others.

The focus with most schemes is on the employer’s ability to recover VAT because few pension scheme trustees register for VAT since they would generally be in a poor position to recover if they did.

Action point: in general, it will be for the employer to take the lead in exploring ways to increase VAT recovery, not the trustees.

DC schemes may also be affected by a separate change of stance by HMRC following another CJEU case, ATP.  This change is confined to VAT on certain investment management costs and will have a much more limited impact.

Old position

In relation to the general issue affecting all schemes, HMRC used to distinguish between the cost of administering a scheme and the cost of managing its investments.

An employer making VATable supplies was able to recover VAT on administration costs but not on investment expenses. This was because they were viewed as part of the employer’s overheads while investment costs were taken to relate only  to the (legally separate) pension scheme. As a long-standing administrative simplification (referred to as “70/30”), if a single invoice was received covering both types of service, HMRC allowed the employer to recover 30% of the VAT.  In principle, the trustees were able to recover the remaining 70% but only if, exceptionally, they were registered for VAT.

Recovery was normally possible regardless of whether the employer or the trustees contracted for the service.

New position

Now HMRC no longer distinguishes between administration and investment costs and, in principle, the employer can recover VAT in relation to all services. These would include, for example, advice services like actuarial, financial (covenant) and legal. On the face of it, this is positive for employers.

The drawback is that HMRC has set tight conditions that may only be achievable in relation to some services: the employer must receive the service, be invoiced for it and pay for it. HMRC wants evidence to demonstrate that the employer is genuinely the recipient. For example, that it is named as a party to the contract and has a material share of the contractual rights and obligations.

In addition, the cost must stay with the employer (to show it is benefiting). If it re-charges the service to the pension scheme, HMRC considers this a further supply of the service on which the employer must account for VAT (that would be unrecoverable in most cases).

Transitional concession

HMRC’s new stance is in effect immediately and the transitional concession it is offering is narrow.

It is that, until the end of 2015, the 70/30 option described above in relation to invoices covering investment and administration services will remain available to employers that want to use it. The administration services envisaged here are those associated with investment management, like preparing asset valuations and performance data.

Ways to improve recovery

Employers and trustees will share the aim of running the scheme as cost effectively as possible.  But because of their particular legal position, trustees may give – and have to give – VAT recovery lower priority than the employer. This is likely to mean it will fall to the employer and its tax advisers to lead the work of exploring ideas that might increase recovery.

There appear to be two main options to try to achieve this:

  • rearrange supply contracts, though in practice this looks likely to be only a partial solution in most cases and
  • in some cases it might be attractive is to set up a company to act as trustee and include it in the employer’s VAT group.

Rearrange supply contracts

Rearranging supply contracts involves considering whether a service currently contracted to the trustees could properly be contracted jointly to them and the employer in a way that meets HMRC’s criteria.

Day-to-day scheme administration looks the most likely candidate since it benefits both employer and trustees in many cases. Any such rearrangement of a contract would require the agreement of the trustees and the supplier, as well as the employer.

However, such a move is likely to be more difficult where the trustees are the natural sole recipients of a service e.g. advice they commission on actuarial or covenant issues, and many investment management services. In addition, trustees face legal hurdles peculiar to their position that may mean the employer cannot properly be made party to the contract for a given supply.

These legal issues include:

  • trust law e.g. should trustees require less than exclusive loyalty from their advisers?
  • scheme rules about hiring advisers and delegation need to be considered;
  • pensions legislation e.g. statutory duties to appoint certain advisers and constraints on the terms of some appointments;
  • general law issues e.g. confidentiality, conflict of interest and legal privilege.

Account will also need to be taken of the legal position of other parties. For example:

  • advisers and service providers might refuse to consider variations in their contracts that could give them legal duties of care to an additional client and
  • some regulated professionals, including lawyers, have professional and legal obligations to be clear who their client is.

Another way to rearrange a supply might be to split it so that certain services could properly be contracted to the employer  in a way that meets HMRC criteria, with the balance contracted to the trustees under a separate agreement.

From time to time, where there is no conflict of interest between them, there might also be circumstances in which trustees and employer could jointly contract for advice on a topic or for the supply of a service in a way that would make VAT recoverable by the employer.

Corporate trustee in employer’s VAT group

Some employers might want to consider setting up a trustee company and making it part of their VAT group. The corporate trustee would be part of the employer’s group of companies and the existing individual trustees would become its directors.

Broadly, the result is that the trustee company and the employer are deemed to be a single person for VAT purposes, which should assist recovery. But there can be disadvantages and there would need to be a careful assessment of the pros and cons from the employer and trustee angles.


HMRC’s new position is a significant departure from the old one that had been in force for a long time.  Over the next year a good deal of effort is likely to be spent exploring how HMRC will apply its new position in practice.  Employers, trustees and advisers will be feeling their way too.

For HMRC’s statement of its new position, see Brief 43/2014.

DC Schemes

After the ATP case, HMRC has accepted that the administration and investment service embodied in certain pooled investment funds designed for DC schemes is exempt from VAT, and should always have been.

However, it may be that relatively few DC schemes will benefit because many already invest in a way that gives them the advantage of the VAT exemption for insurance.

Briefly, the type of fund newly recognised as qualifying for exemption (run, say, by an investment management firm) must have all the following characteristics:

  • it receives contributions only from scheme members and (where they contribute) from their employers,
  • the members bear the investment risk,
  • the fund contains the pooled contributions of a number of members and
  • the risk borne by the members is spread over a range of securities.

The investment firm is not now obliged to account to HMRC for VAT on the service such a qualifying fund provides to schemes, and there is no VAT to add to trustees’ bills.

The services that qualify for exemption are those administrative and investment services that are, in HMRC’s words, “integral (i.e. specific and essential)” to the operation of the fund. There is EU case law on the services this covers.

Trustees who receive bills that include VAT in connection with a fund they think ought to be exempt should contact the investment firm to discuss the position.

See HMRC’s Brief 44/2014.

Reclaiming overpaid VAT

It may be possible for an employer to make a claim for a refund of VAT where it can demonstrate that the recovery  it would have received under the principles of the PPG case and HMRC’s new guidance is better than the amount recovered using the 70/30 split. Any such claim must be made within four years of the relevant VAT accounting period and must be supported by calculations and relevant documentation. There are pros and cons to making a claim and a cost/benefit analysis should be done.  Brief 43/14 has further details about reclaims.

In respect of the ATP case, investment firms may be able to reclaim VAT from HMRC where exemption should have been available in the past.  However, such claims can generally only be made if the benefit is passed back to the recipient of the supply (usually the trustees).

Depending on the terms of the contract between them, trustees may be able to recover VAT they have paid from the investment firm.  They should start a dialogue with the investment firm about recovering incorrectly charged VAT.