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05 Nov 2015

HMRC issues more guidance on the deduction of VAT on pension fund management costs (but it's not the end of the story!)


Pensions alert email

Earlier this year HMRC confirmed that sponsors of DB pension schemes may reclaim VAT charged on pension fund management costs as their own input VAT where the services are provided to the sponsoring employer. An additional requirement was that the service provider, the employer and the scheme trustees entered into a tripartite contract (see Pensions alert: VAT on pension fund investment management costs for further information).

HMRC has now issued Revenue and Customs Brief 17/15: deduction of VAT on pension fund management costs , which contains further guidance on the circumstances in which VAT might be reclaimed.

This guidance provides welcome clarification on some outstanding issues relating to VAT and pension costs. However, a number of issues remain unclear and, so, this is by no means the end of the story!

Transitional period extended

The good news for scheme sponsors is that the transitional period during which they may continue to use the VAT treatment outlined in the existing HMRC VAT Notice has been extended by a year. It will now end on 31 December 2016.

This will be welcome relief for some employers as current invoicing practices can continue for a while longer. Crucially, more time is available to restructure existing arrangements to maximise VAT recovery under the VAT regime that will apply from 1 January 2017.

Tripartite contracts and corporation tax

Following concerns about the implications of a tripartite contract for an employer's corporation tax deduction, HMRC has confirmed that an employer will not be entitled to such a deduction where it pays directly for scheme asset management costs under a tripartite contract.

HMRC is still considering whether there are alternative tripartite structures which would enable a corporation tax deduction.

Alternatives to tripartite contracts 

HMRC comments on two alternative options to tripartite contracts which might be used to obtain a VAT deduction:

  • the supply of scheme administration services by the trustees to the employer by contract;
  • and "VAT grouping" whereby a corporate trustee is added to the employer’s VAT group.

However, the guidance suggests that full VAT recovery may not always be achieved where VAT is incurred on asset management services.

Where next for pension schemes and VAT?

Further guidance is expected from HMRC later this year. This will hopefully remove the remaining uncertainty and allow employers and trustees to draw a line under what they need to do to obtain the relevant input tax deductions from January 2017 onwards.

Outstanding issues which HMRC still need to address include:

  • providing specific guidance on VAT recoverability on other pension service costs, e.g. accounting, actuarial, covenant and legal services; and
  • the proposal recently put forward by the Association of Pension Lawyers for obtaining VAT deductions, i.e. that scheme rules could be amended to reflect that the scheme is run for the employer's benefit.

How can we help?

We can assist employers and trustees with deciding what further action is needed to reclaim VAT from 2017. We can also prepare or review service provider agreements designed to enable VAT to be reclaimed.

However, it seems sensible to delay taking any definitive decisions until further HMRC guidance is issued (expected later this year). We will be providing a further update once the guidance becomes available.



Graham Wrightson

Graham Wrightson

T:  +44 20 7809 2557 M:  +44 7826 945 534 Email Graham | Vcard Office:  London