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VAT and Pensions: HMRC puts off clarifying the rules.


“Never put off till tomorrow what you can do the day after tomorrow just as well.”

– Attributed to both Mark Twain and Oscar Wilde

September 6 2016 was Fight Procrastination Day. But someone forgot to tell HMRC.

The circumstances in which VAT can be reclaimed in relation to services provided to a pension scheme are extremely complex. Traditionally, HMRC policy had been to distinguish between costs incurred in relation to the setting up and day-to-day administration of occupational pension schemes, and the costs incurred in investment management relating to scheme assets.

David Piltz

David Piltz

HMRC allowed employers to deduct VAT incurred in relation to the administration of an occupational pension scheme on the basis these were overheads of the employer and linked to the employer’s business activities. However, it viewed investment management costs as relating solely to the activities of the pension scheme. To the extent that these charges were deductible, they were deductible only by the pension scheme. As trustees are not generally registered for VAT the charges were therefore usually unrecoverable.

Where a single invoice was issued, covering both administration and investment costs, HMRC allowed the employer to claim 30% of the VAT as being related to the administration of the scheme, and it was left to the scheme to recover the remaining 70% as relating to investment management costs if the trustees were able to do so (the 70/30 rule).

In recent years a number of European Court cases have cast doubt on HMRC’s view, and it’s fair to say the decisions have not always gone the way HMRC would have liked. A series of HMRC briefings, and three years of uncertainty, have done little to clarify the position for defined benefit pension schemes, and a further much-awaited briefing promised in the summer failed to materialise.

Instead, on Fight Procrastination Day, HMRC kicked the can down the road again, announcing that the issue was so complicated it needed further time to provide guidance on it. The 70/30 rule, which was due to be withdrawn from the end of this year, will remain in place until 31 December 2017.

Of course HMRC will have to come to grips with this problem sooner or later, but by kicking the can down the road they, like Wilkins Micawber, are hoping “something will turn up”.