HMRC has introduced a more generous VAT policy that will allow some businesses to recover more VAT from defined benefit (DB) pension schemes they support. However, with complex rules and documentation requirements, Richard Holm, tax partner at RSM UK, examines the new policy in more detail, and the potential tax implications for employers and trustees.
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“HMRC has announced a policy shift that will allow some businesses to recover more VAT on the operation of the DB pension funds they support. In the past, most VAT on investment services was blocked as a cost to the pension fund. HMRC now accepts that these costs are an overhead cost of the sponsoring employer. While this is a significantly more generous stance than HMRC’s previous policy, some care is required before realising the benefit (both of historic costs and future activity) of this change.
“Following a European court decision in 2013, HMRC was forced to review its policy on the reclaim of VAT on running a pension fund. A variety of solutions were implemented by businesses seeking to implement this policy. However, these solutions were complex, hard to administer and did not deliver all the savings which the Court of Justice of the European Union decision suggested were available. After years of discussion on this point HMRC now seems to accept a more pragmatic approach. HMRC’s new policy (which takes effect from 18 June 2025) states that so-called investment costs can be treated as the sponsoring employers’ VAT provided that the “normal” rules for VAT recovery are met. Unfortunately, it is not immediately clear what “normal rules” means in this context.
“HMRC might be saying that employers can treat the pension scheme VAT like any other business overhead (and only subject to partial exemption or non-business restrictions). Alternatively, HMRC might require employers to have a direct contractual/invoicing relationship before reclaiming the VAT. HMRC has promised to release more information in autumn this year, which we hope will give more clarity.
“Employers should undertake a detailed review of the documentation held on their defined benefit scheme costs. This might enable them to submit claims to HMRC; but the four-year cap is likely to result in VAT falling ‘out of time’ to claim if submissions are not made in a timely manner. Further, it will help to put in place processes to secure future savings.
“Trustees may also need to adapt current processes, ensuring service agreements and invoicing comply with VAT guidance to support employer claims for the VAT incurred. Given the area’s complexity and HMRC’s likely scrutiny, both the employer and any VAT registered trustees will need to implement robust procedures to minimise the risk of VAT errors
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