Managing VAT on funded pension schemes

Josie Morgan-Jones, Manager, VAT and Customs Duty services

A funded pension scheme is when employer and employee pension contributions are vested in a separate trust, which usually operates separately from the employer’s business.

VAT registered charities involved in making taxable supplies of goods or services can recover VAT on costs incurred in the administration of a pension scheme. However, the rules are complex, so it is important the correct procedures are followed, and evidence is retained.

What is the VAT position?

HMRC consider the administration and management of the pension scheme to be part of the employer’s normal business activities. As such, HMRC accepts that the input tax incurred on the day-to-day management of the fund is the employer’s input tax.

As most suppliers will be engaged with the trust rather than the employer, there can be some confusion regarding the VAT recovery position for the employer. There are two situations whereby the employer is entitled to recover input tax on management services:

the trust recharges the value of management services only to the employer
the supplier issues its invoice for management services directly to the employer (despite being engaged by the trust).

Both examples allow the employer to treat this input tax as its own, as it is in possession of a valid VAT invoice and consumes the supplies provided. Although, it is important to note that in the first example, the trust must be registered for VAT in its own right.

The distinction between management and investment services

As outlined above, only input tax incurred in relation to the management of the pension fund can be treated as the employer’s input tax. Employers cannot recover VAT on costs incurred that relate to the investment activity.

Therefore, a distinction must be made between the management and investment services incurred by the trust. We have provided a table below from HMRC’s guidance, this provides a basic division of both management and investment services:

Management services	Investment services
Making arrangements for setting up a pension fund	Advice connected with making investments
Management of the scheme, that is collection of contributions and payment of pensions	Brokerage charges
Advice on reviewing the scheme and implementing changes to it	Rent and service charge collection for property holdings
Accountancy and auditing relating to the management of the scheme, such as preparation of the annual accounts	Producing records and accounts in connection with property purchases, lettings and disposals or investments
Actuarial valuation of the assets of a fund	Trustee services that are services of a professional trustee in management of the assets of the fund
General actuarial advice connected with the administration of the fund	Legal services paid on behalf of representative beneficiaries in connection with changes in pension fund arrangements
Providing general statistics in connection with the performance of a fund’s investments or properties	Custodian charges
Legal instructions and general legal advice, including drafting trust deeds, insofar as it relates to the management of the scheme

What does this mean for your organisation?

If you have a pension scheme, your organisation should consider whether it is entitled to recover input tax on the management costs. Organisations should review the VAT incurred on management services and whether there is scope to adjust its VAT claim historically.

What should I do if we are not VAT registered?

We are aware that a number of pension funds have been required to register for VAT on a compulsory basis. The reason for VAT registration has been that the VAT registration threshold has been breached as a result of advisory services (including those listed under ‘management services’ in the table above) which are received from outside of the UK.

Whilst this article has focussed on the benefits of being able to recover VAT, all defined contribution pension funds that are not currently registered for VAT should review their position to ensure that a VAT registration is applied for if necessary.