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Introduction

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The recovery of VAT in relation to pensions provided by employers will depend on the type of scheme being operated.  Generally speaking schemes that are not funded schemes where the employer and employee pension contributions are not vested in a separate corporate or individual Trustee will recover input VAT under the normal rules.  In this case the pension funds is not distinct and separate from the employers business and any input VAT incurred on costs will be the employers and recovered in line with it's partial exemption method.

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These types of pension schemes are normally set up as follows: 

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• An insurance based scheme where retirement benefits are secured through an insurance policy

• An ‘unfunded’ scheme where no specific funds are set aside to pay pensions

• A scheme where the employer provides for the payment of pensions by a segregated reserve fund in the balance sheet, represented by specific assets

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Funded Pension Schemes

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Management Expenses and VAT -  Where Employers set up funded pension schemes for their employees, the VAT incurred on setting the scheme up and it's day to day management belongs to the Employer even where these activities are carried out or paid for by the trustee.  

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Examples of such costs are listed below:

• Making arrangements for setting up a pension fund

• Management of the scheme, that is collection of contributions and payment of pensions

• Advice on reviewing the scheme and implementing changes to it

• Accountancy and auditing relating to management of the scheme, such as preparation of the annual accounts

• Actuarial valuation of the assets of a fund

• General actuarial advice connected with administration of the fund

• Providing general statistics in connection with the performance of a fund’s investments or properties

• Legal instructions and general legal advice, including drafting trust deeds, insofar as it relates to the management of the scheme

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Investment Activity Expenses and VAT -  Where the trustees carry out investment activity and incur VAT on the associated cost,  the VAT does not belong to the Employers business and cannot generally recover it.  (Even if the employer pays for the costs on behalf of the trustee)

 

• Advice connected with making investments

• Brokerage charges

• Rent and service charge collection for property holdings

• Producing records and accounts in connection with property purchases, lettings and disposals or investments

• Trustee services, that is services of a professional trustee in managing the assets of the fund

• Legal services paid on behalf of representative beneficiaries in connection with changes in pension fund arrangements

• Custodian charges

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Costs Recharged to the Trustees or Reimbursed by the Trustees

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Where the employer recharges costs it has incurred on behalf of the pension fund to the trustees, it should only include Output VAT where the costs are specifically incurred in relation to Investment advice or connected with the pension funds own business such as property management costs. 

 

 

External Trustees, Investment Managers. Property Manager

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Services provided by Professional Trustees, Investment Managers and Property Managers will often include both Management and Investment type services and will possibly be billed as a single charge.  As the Employer is only entitled to recover VAT on management type costs, it will be necessary to apportion the costs between Investment and Management type services to facilitate VAT recovery.  Where invoices from the external trustee or manager do not provide a useful split, then HMRC will allow a split of 30% Management / 70% Investment.   

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Where employers feel this split does not provide a fair and reasonable apportionment, they can adjust this apportionment provided they supply HMRC with justification. 

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Pension Funds in a VAT Group 

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Pension Trustees that are corporate bodies can  be included as a member of a VAT Group. 

 

The effect of this will be that: 

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• The representative member (nominated entity for paying and recovering VAT from HMRC on behalf of the VAT Group) of the VAT Group will be liable for any Output VAT billed by the trustee in relation to taxable services provided in the course of carrying out its duties. 

• Input VAT incurred by the trustee in carrying out its business will be treated as the Input VAT of the representative member

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Note - If the fund provides pensions for employees of companies outside the VAT group, any VAT incurred on management of the scheme for those companies is not treated as being for the purposes of the representative member’s business. Tax incurred should be apportioned so that only so much as relates to group members is treated as received by the representative member.  VAT incurred by group members is recoverable by the representative member if it is attributable to supplies made to persons outside the group which carry the right to deduct input tax. Any non-business and exempt supplies made by the employer or trustee must be taken into account when considering VAT recovery.

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-Contains public sector information licensed under the Open Government Licence v3.0.

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