Twelve month extension of transitional regime for VAT on pension scheme costs announced

Unlock the funds in your pension scheme

This blog is targeted at:

  • businesses and other taxable entities that provide pension schemes for their employees
  • pension fund management providers
  • pension scheme trustees and pension providers
  • tax advisers

HMRC has recently provided an update in relation to VAT recovery on fund management services for defined benefit pension schemes following the judgment in PPG Holdings. This case concerned an employer’s entitlement to deduct VAT paid on services relating to the administration of defined benefit pension schemes and the management of their assets.
They have announced a twelve month extension to the transitional period which was due to end on 31st December 2015. During this period, employers and pension funds can continue to apply the “old” rules for recovering VAT on pensions-related services, as set out in VAT Notice 700/17.

They have also given their view on potential arrangements employers may wish to adopt in the future to achieve VAT deduction for the costs of administering occupational pension schemes and managing their assets.

As things stand currently, employers wanting to claim VAT on expenditure relating to their defined benefit occupational pension scheme will be required to comply with new procedures from 1 January 2017. There are however, sizable practical problems that need to be surmounted in order to meet the new requirements and this is the reason for HMRC’s announcement.

The new rules require employers to satisfy various criteria prior to reclaiming VAT on pension scheme management costs. A key requirement is that the party both receiving and paying for the services supplied by the manager must be the employer. This requirement is problematic, as it is generally the trustee who engages with the manager for its services in order to satisfy pension regulations.

Earlier this year, HMRC endeavoured to address this issue by stating that they would allow the use of a tripartite agreement between the manager, the trustee and the employer to establish that this condition had been satisfied. Several parties raised their concerns with this suggestion as it could have an adverse impact on a company’s corporation tax position. This being the case, HMRC has extended the deadline so that the possibility of utilising alternative tripartite structures that would not result in a corporation tax issue can be explored.

If you would like to discuss any issues that you have regarding VAT and pension funds with a VAT specialist, please contact Gill Yates at or on 0845 177 5000.

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