Business as usual for pension schemes and VAT

In a surprise recent announcement HMRC has finally settled the position on VAT treatment and DB pension schemes – and it’s good news for employers!

What did HMRC announce? 

Following:

  • years of uncertainty,
  • a number of complex cases (as reported in previous blogs),
  • a change in HMRC policy;
  • a review of the effect of the change in policy; and
  • the implementation of a transitional period (extended numerous times and due to end on 31 December 2017) for employers to continue to use the old rules whilst the review took place,

HMRC finally announced that the existing rules and treatment for input tax deduction which were used by most DB employers will continue going forward. No mention was made of a need to extending the transitional period.

Why the uncertainty in the first place?

Following the PPG case, the Court of Justice of the European Union (CJEU) decided that employers could deduct VAT on services relating to the administration of pensions and the investment management of the pension scheme’s assets.  This prompted a change in HMRC’s policy to cease to apply a blanket exclusion on the recovery, by employers, of VAT on investment management services pending completion of their review.

What does HMRC’s decision mean?

The pre PPG rules will now remain in place. These rules allowed employers to deduct VAT incurred in relation to the general administration costs of an occupational pension scheme. This was because these costs were considered to be overheads of the employer and had an immediate and direct link to the employer’s business activities.

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