The guidance has been published in an internal document, but not disseminated more widely.

In October last year, HMRC announced a 12-month extension to the transitional period where an employer can deduct VAT paid on services relating to the administration of DB pension schemes and the management of their assets.

The transitional period, which was due to end on 31 December 2016, was extended to 31 December 2017.

This followed the Court of Justice of the European Union (CJEU) decision in Fiscale Eenheid PPG Holdings which concerned an employer’s entitlement to deduct VAT paid on services relating to the administration of defined benefit pension schemes and the management of their assets.

During the transitional period, HMRC advised that employers can continue to recover the VAT incurred in the administration of the scheme (subject to invoices being addressed to it and the normal VAT recovery rules applying), but cannot recover VAT incurred from fund investment services.

Where a fund manager provides both administration and investment services, and where these services are included in the same invoice, HMRC will normally allow an employer to recover 30% of VAT incurred on those fees as being related to administration, subject to the normal rules of VAT recovery.

At the time the transitional period was extended, HMRC said it would provide further clarification on the policy going forward.

The HMRC internal manual on VAT input tax now states that following the review and in consideration of the difficulties encountered by some taxpayers with implementing options that would allow appropriate deduction of VAT as per PPG, HMRC has come to the view that the existing rules for input tax deduction will continue to be available to taxpayers going forward, together with the newer options following PPG.

Which option is applied will depend on whether the employer does or does not directly contract and pay for the services used to run the pension scheme.

The updated guidance outlines rules that can be used for services used to run an occupational pension scheme where an employer does not directly contract and pay for those services; and rules that apply following the judgment in PPG that can only be used for services received by an employer who directly contracts and pays for them. 

Commenting on the publication of the internal guidance, Ian Bell, head of pensions at RSM said: ‘Whilst HMRC’s change in policy will no doubt be welcome, it is somewhat concerning that the updated guidance has only been made available some eight weeks before the pre-defined transitional period was due to expire, and even then, only by means of HMRC’s internal manuals. We have yet to see anything published via any public forum, for example through an HMRC briefing or information notice. This is poor form and HMRC should do better.’

HMRC internal manual VAT Input Tax is here.

Report by Pat Sweet