HMRC has recently updated its guidance on the recovery of VAT incurred on services related to occupational pension schemes. This adjustment is significant for employers who sponsor pension arrangements for their staff, as it widens the scope of VAT that businesses may be able to recover.
What was the previous treatment?
Historically, HRMC drew a distinction between two categories of pension scheme costs:
- Scheme administration costs – For example, processing new joiners and leavers, maintaining records and paying benefits. These costs were generally recognised as business overheads, meaning the employers could reclaim the VAT incurred.
- Investment management costs – Such as the purchase and sale of assets within the scheme. HMRC initially considered these to be the costs of trustees, not the employer. As a result, VAT on these services could not usually be reclaimed by the business (unless the trustees themselves were VAT registered and linked to taxable supplies within the fund).
The split treatment meant that a substantial amount of VAT often remained irrecoverable for businesses.
The new HMRC position
Following European case law, HMRC has revised its approach. From 18 June of this year, employers were entitled to recover VAT incurred on both administration and investment management services relating to occupational pension schemes, subject to the normal VAT recovery rules.
Practical considerations for businesses
While the change is welcome, it is not without complexity. Key point businesses should consider include:
- Partial exemption – For businesses that make both taxable and exempt supplies, this change may affect their partial exemption method and the proportion of VAT they can reclaim. A review may be necessary to ensure the methodology remains fair and reasonable.
- Evidence – As with all VAT recovery, businesses will need to hold appropriate VAT invoices and ensure that the contractual arrangements for pension services are clearly understood.
- Retrospective claims – Employers should assess whether there is value in submitting claims for past costs. Timing is important, as claims are limited to four years.
How we can help you
Our VAT advisory team can assist you with assessing eligibility, preparing claims and ensuring you remain compliant while claiming where you should be. If you would like to discuss this topic in relation to your own business, or if you have any queries, please do not hesitate to get in touch with Jessica Mason, our Head of VAT today.
Email: [email protected]
Phone: 01926 422292
