VAT on pension costs - Part 5: Throwing in the towel?

HM Revenue and Customs (HMRC) has conceded, as predicted, that a Europe-wide VAT ruling on Defined Benefit (DB) pension scheme costs will not be applied in the UK. Tyron Potts considers why - and what trustees and corporate sponsors should do next.


For the past four and half years, pension schemes have been waiting for firm guidance from HMRC as to how a Court of Justice of the European Union (CJEU) ruling in the case of the Dutch Company Fiscal Eenheid PPG Holdings BV (PPG) should be applied to the costs they incur. 

Historically, many sponsors who have been meeting pension administration expenses directly have been able to reclaim the VAT on those costs as a legitimate business expense. In July 2013, the CJEU ruled that in order to continue this practice, they must establish a ‘’direct and immediate’’ link between the employer and the expense on which VAT is charged.  HMRC’s interpretation was that the employer should be a party to the contract, pay for the services directly and be the recipient of those services.

In a series of briefing notes and updates between 2014 and 2017, HMRC has:

  • stated that VAT on ‘administration services’ (such as actuarial and administration fees) was deductible (recoverable) by the sponsoring employer but that, VAT on ‘investment management services’ could not be deducted.
  • implemented a transitional rule under which employers could assume a 30:70 split between administration and investment management services where an explicit breakdown of combined invoices was not available or it was unclear to which classification the fees related.
  • extended this transitional rule on three separate occasions as they grappled with the complexities.
  • considered a number of potential workarounds which included:
    • tripartite contracts between trustees, sponsoring company and scheme advisers
    • trustee companies joining the sponsoring company’s VAT grouping; and
    • setting up an onward supply (or ‘back-to-back’) arrangement where a VAT-registered trustee is effectively sub-contracted by the sponsor to run the pension scheme

HMRC's latest briefing

Actually, HMRC has not (at the time of writing this blog) issued any further briefings about VAT on DB pension costs. With little fanfare, it has instead updated an online technical manual to reflect its current stance.

Possibly with half an eye on Brexit (when the UK may no longer be bound by certain CJEU rulings), HMRC has now:

  • confirmed that the VAT-reclaim approach set out in previous briefings (notably VAT notice 700/17) will remain available to use after 31 December 2017.
  • conceded that where one of the workarounds described above (tripartite contracts etc) has already been implemented, or is implemented in future, employers may instead continue to use this route to reclaim VAT.
  • issued a more detailed list of what constitutes ‘administration services’ and ‘investment management services’ to help with splitting out invoices.
  • reminded us that many DC schemes will continue to benefit from a VAT exemption by virtue of being classified as a ‘Special Investment Fund’ (SIF).
  • closed a loop-hole (originally with effect from 1 January 2018, but now from 1 April 2019) which allowed insurance companies to treat their pension fund management services as VAT exempt (unless provided to a SIF).

Next Steps

Whilst it may be tempting to do nothing, maintaining the status quo may not always result in the optimal VAT recovery. Employers and trustees should therefore engage with advisers to establish how their services are classified and whether additional VAT might be reclaimed by the pension scheme’s sponsor.  

Where the scheme is run by an insurance company, trustees could take this opportunity to review whether costs are likely to rise from 2019 as VAT will now be incurred on management costs.

If you have restructured contractual agreements between trustees, sponsors and advisers in order to position for future VAT recovery, you should be aware of possible complications that may arise in relation to additional corporate tax liabilities for example. In such cases, specialist tax advice may be appropriate. 

It seems that, after several years (and several blogs – which you can see below) we have come full circle in relation to VAT and many employers will find that the wait-and-see approach has paid off.

VAT on pension costs – part 1

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VAT on pension costs – part 2

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VAT on pension costs – part 3

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VAT on pension costs – part 4

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