HMRC has updated its internal VAT manual (the Manual) in relation to when an employer can recover VAT on services provided to its defined benefit pension scheme. The Manual confirms that the current rules on recoverability of VAT will continue to apply in future. They were originally intended only to remain in force as a temporary measure until the end of 2017.

This means that VAT for administration service costs will, generally speaking, continue to be recoverable by the employer. In addition, VAT for investment service costs will continue to be partially recoverable by applying a 30/70 split. This allows an employer to reclaim 30% of VAT if the trustees provide a mixed invoice from a single firm for administration and investment services.

However, the Manual now provides a more detailed description of what HMRC considers to be administration or investment services. This might allow a more accurate split of services which results in more effective VAT recovery than can be achieved by the 30/70 split.

The Manual refers to a range of alternatives which effectively require the employer to be included in the contractual arrangements governing the provision of the investment services. For example, an employer could enter into a tripartite contract with the trustees and the investment service provider which meets minimum requirements. However, it may prove difficult to construct a contract which meets competing legal and regulatory requirements and there may be associated conflict of interest and corporation tax complications.

Other options are mentioned in the Manual, including a commercial arrangement (whereby the trustees are engaged by the employer to run the scheme) or the use of VAT grouping (whereby a corporate trustee is added to the employer’s VAT group). There are likely to be associated tax and operational issues with all of these alternative options.

So, after three years of uncertainty, HMRC seems to have come full-circle. On the plus side, it appears to have reached a landing which allows employers and trustees to proceed with some certainty when considering the most effective way to recover VAT.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.