09 November 2017

The current rules about when an employer can recover VAT in relation to services to its DB pension scheme will continue to apply in future, HMRC has confirmed in revised pages of its VAT manual.

As a result, recoverability of VAT will continue to depend on the nature of the service rather than who contracted for it and received it. The distinction between costs relating to administration (VAT recoverable by the employer) and those to do with investment (VAT not so recoverable) remains central.

The current rules have remained in force as a temporary measure (expiring at the end of 2017) pending HMRC’s review of VAT and DB schemes following the PPG case (2013). That was the ECJ case that brought into question the UK’s rules denying the employer recovery of VAT on investment related costs in all circumstances. That review has now concluded.

Helpful changes

There is a fuller and more workable list of activities categorised according to whether they count as administration or investment. This will make it clearer where the line falls.

Where all parties agree, invoices for advice to the trustees on the administration of the scheme (but not on investment) can continue to be addressed to the employer and it can recover VAT. If the employer recharges these costs to the trustees, it need not impose VAT. 

The pragmatic option to split a bill for a combined investment and administration service 70/30 remains available. For some it may be that the updated categorisation will allow a more accurate split and fuller recovery.

Tripartite contracts and other options

The continuation of the current rules does not rule out other arrangements if they are attractive to a particular employer or group and the scheme trustees. VAT grouping and onward supply of services by the trustees to the employer are examples.

So is a tripartite contract between a service supplier, the trustees and the employer.

This option has received a lot of attention since the PPG case. But it has proved more or less impossible to construct a contract that satisfies all the competing legal and regulatory demands. 

These include the tight criteria HMRC sets for VAT recovery: that the employer contracts for the services, receives them and pays for them directly. In addition there are issues of conflict of interest between trustees and employer, and particular legal and regulatory demands on some service suppliers.

In a further hurdle, HMRC has reaffirmed its view in relation tripartite contracts that an employer paying directly for investment services is not entitled to a corporation tax deduction in the majority of cases. This is down to the way such costs are treated under accounting standards.


After much difficulty within the industry in finding appropriate solutions to the VAT question, it is a welcome relief that HMRC has agreed to allow the existing options to continue. Some will be able to use the new options as well.

This is not the end of the pensions story on VAT, however. 

In the United Biscuits case two arguments are being made to try to recover VAT on investment management for the pension scheme from 1974 and 2014. One is based on the EU VAT Directive. The other is that imposing VAT or not according to the regulatory status of the supplier (insurer – no VAT; fund manager – VAT) offends the EU law principle of fiscal neutrality. This is the idea that the tax treatment of a service should be the same regardless of the business structure chosen for delivering it. The case was heard in October and judgment is awaited.

Key contact

Richard Knight

Richard Knight Partner

  • Head of Pensions Practice
  • Pensions Services
  • Pensions Legal Advice

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