Funded pension schemes (VAT Notice 700/17)
Find out how to claim input tax on funded pension scheme expenditure for both employers and trustees.
1. Funded Pension schemes — an overview
1.1 Information in this notice
This notice provides guidance about claiming input tax on funded pension scheme expenditure for both employers and trustees.
1.2 Definition of a funded pension scheme
A funded pension scheme is an arrangement that promises members a pension benefit and is typically established under trust.
Employers and employees will usually contribute towards the scheme. These contributions are held on trust and managed by separate trustees, who may be individuals or corporate bodies. The scheme and its assets are normally separate and distinct from the employer’s business.
1.3 Purpose of the special rules for funded pension schemes
Most employers set up their pension scheme under trust deed and the appointed trustees control the funds. Each party (the employer and the trustees) has separate responsibilities, duties and activities. They each must consider their own ability to treat tax incurred as input tax. In running schemes various professional services are required (for example, solicitors, fund managers, actuaries).
This notice explains how and when employers and trustees can claim input tax in relation to funded pension schemes.
1.4 Other kinds of pension schemes
An employer may provide pensions to his employees by means of one of the following:
- an insurance based scheme where retirement benefits are secured through an insurance policy
- an ‘unfunded’ scheme where no specific funds are set aside to pay pensions
- a scheme where the employer provides for the payment of pensions by a segregated reserve fund in the balance sheet, represented by specific assets
In these cases, the normal VAT rules apply. Supplies are made to the employer who can claim input tax subject to any necessary partial exemption restriction.
1.5 If you make exempt supplies
Where you make exempt supplies the amount of input tax you can deduct may be restricted. You’re entitled to deduct the input tax incurred on costs that you use or intend to use in making taxable supplies.
You cannot normally deduct input tax incurred on costs that relate to your exempt supplies. If your input tax relates to both taxable and exempt supplies, you can normally deduct only the amount of input tax that relates to your taxable supplies. You can find more information in Notice 706: partial exemption.
2. Guidance for employers about claiming input tax
2.1 Pension scheme activity that forms part of your business activities
The management of your own employee pension scheme is a part of your normal business activities. If you’re a VAT-registered employer, and set up a pension scheme for your employees under a trust deed, the VAT incurred in both setting up the scheme and on its day-to-day management is your input tax. This applies even where responsibility for the general management of the scheme rests (under the trust deed) with the trustee, or the trustees pay for the services supplied.
When trustees make investments, acquire property or collect rent from property holdings, these are all treated as ‘investment’ activities for the purposes of this notice. You can also treat the input tax incurred on these investment activities as your input tax.
2.2 Types of ‘management’ services that you can claim input tax on
You can claim for:
- making arrangements for setting up a pension scheme
- management of the scheme, that is collection of contributions and payment of pensions
- advice on reviewing the scheme and implementing changes to it
- accountancy and auditing relating to management of the scheme, such as preparation of the annual accounts
- actuarial valuation of the assets of a fund
- general actuarial advice connected with administration of the fund
- providing general statistics in connection with the performance of a fund’s investments or properties
- legal instructions and general legal advice, including drafting trust deeds, insofar as it relates to the management of the scheme
2.3 Types of ‘investment’ services you can claim input tax on
You can claim for:
- advice connected with making investments
- brokerage charges
- rent and service charge collection for property holdings
- producing records and accounts in connection with property purchases, lettings and disposals or investments
- trustee services, that is services of a professional trustee in managing the assets of the fund
- legal services paid on behalf of representative beneficiaries in connection with changes in pension scheme arrangements
- custodian charges
2.4 Evidence you need to claim input tax
You should hold tax invoices made out in your name. If the trustees pay for the supplies on your behalf, you should arrange for the suppliers to make out the invoices in your name.
2.5 If you’re reimbursed by the trustees or charge them for costs you incur in managing the pension scheme
If the services are of the kind described in sections 2.2 and 2.3 then you should not charge output tax. This is because these costs are treated as your own business costs. You must account for output tax where similar arrangements are adopted for services connected with the pension scheme’s own business activities.
2.6 If a third party manages the scheme
A fund manager, property manager or professional trustee may be appointed to manage the scheme. Usually, their charges will cover both management as well as investment services. You can deduct the input tax incurred on investment and administration services provided by a fund manager.
If the supplier issues a single tax-inclusive invoice for both kinds of services, you can deduct the input tax relating to the investment and management services in full. This is provided that the invoice is in your name and is subject to any partial exemption restrictions in place. There is no longer a requirement to apportion dual-use costs between you and the trustees of the pension scheme.
If the invoice is in the name of the trustee, they can deduct the input tax (see section 3.3). However, if the trustee makes a taxable charge to you for their management of your pension scheme, you can deduct input tax on that charge.
2.7 Pensions provided for the employees of more than one employer
This section does not apply where employers are members of the same VAT group registration — see section 4.
Some pension schemes provide pensions for the employees of several employers who may have a commercial link or be entirely separate from each other. In such cases each employer can only treat as input tax that proportion of the management services proper to their own employees.
Where a person supplying management services to the fund issues a single invoice, either one of the employers or the trustee (in the case of entirely separate employers) may act as paymaster. The paymaster can treat all the VAT on management services as input tax if they recharge each of the other employers with their share of the costs plus VAT.
A person acting as paymaster must issue a VAT invoice to each of the respective employers. They can then treat the tax as their input tax.
2.8 If you cease to be in business
If you cease trading, and therefore cease to be an employer, you no longer have any entitlement to input tax relating to the pension scheme. But where the trustees are themselves VAT-registered on account of business activities carried out by the pension scheme they may treat the tax incurred on services connected with the continuing management of the scheme as their input tax, subject to the normal rules. This means that where the trustees are required to restrict recovery of input tax because they make exempt supplies not all the tax on the management services may be recovered — see section 1.5.
Where a professional trustee is appointed to run a pension scheme, for example where the sponsoring employer ceases to exist, VAT incurred on the management of the pension schemes can only be recovered by the trustee insofar as it is a clear cost component of an onward supply of that management of the pension scheme.
3. Guidance for trustees about claiming input tax
3.1 Find out if you need to be VAT-registered
A pension scheme has no legal status being represented by its trustees. If you are the trustee of a scheme and it makes taxable supplies, for example it’s waived exemption in relation to supplies of property, you must consider whether you need to be VAT-registered.
3.2 Services you can claim input tax on
If you are VAT-registered you can treat VAT incurred on goods and services used, or to be used, for the purposes of your business as input tax. VAT on supplies connected with the management of a pension scheme is normally not your input tax (see section 2.8 where an employer has ceased business). This is because these supplies are primarily regarded as being the responsibility of the employer.
This is also the case with supplies connected to the investments of the pension scheme. You can only treat VAT incurred as your input tax if you can provide evidence (such as VAT invoices in your name) that the services have been supplied to you. Where you make exempt supplies your recovery of input tax may be restricted — see section 1.5.
3.3 If a third party manages the scheme
If the invoice is in your name, you can deduct the input tax if the third party does both of the following:
- provides management and investment services
- issues only one inclusive invoice
If the invoice is in the name of the employer, you will not be entitled to deduct the input tax (see section 2.6).
4. Group registrations and pension schemes
4.1 Including a sole trustee of a fund in a VAT group registration
A sole trustee of a fund may be included in a VAT group registration with the employer, provided it is a corporate body (see Notice 700/2: group and divisional registration.
4.2 Effect of a corporate trustee being included in a group registration
This has implications for both your outputs and inputs.
4.2.1 Outputs
When a corporate trustee is included in a VAT group registration, any business supplies made by the trustee are treated as being made by the representative member. This includes the trustee dealing in the assets of the fund.
4.2.2 Inputs
Tax incurred on supplies to the trustee can be treated as received by the representative member.
If the fund provides pensions for employees of companies outside the VAT group, any VAT incurred on management of the scheme for those companies is not treated as being for the purposes of the representative member’s business. Tax incurred should be apportioned so that only so much as relates to group members is treated as received by the representative member. Alternatively, the representative member may elect to use the paymaster arrangement — see section 2.7.
VAT incurred by group members is recoverable by the representative member if it is attributable to supplies made to persons outside the group which carry the right to deduct input tax. Any non-business and exempt supplies made by the employer or trustee must be taken into account when considering VAT recovery.
4.3 Corporate trustee liability for meeting VAT debts of the representative member
Normally all group members are jointly and severally liable for tax due from the representative member. In the case of a corporate trustee however, we are advised that this liability does not extend to the assets of any trust, for example a pension scheme of which the corporate trustee is the trustee, except to the extent the group VAT debt is attributable in whole or in part to the administration of the trust.
5. Insolvent companies
Where a company is being wound up but still exists as a legal entity, and is still receiving supplies for which it’s liable for VAT, then VAT on those supplies is deductible under the provisions of Section 94 of the VAT Act 1994. This includes VAT on costs incurred in winding up the company’s occupational pension scheme.
Where the VAT deductible on such supplies exceeds the output tax owed by the company to HMRC for the relevant period, the company may reclaim the balance of the VAT deductible for that period through the office of its insolvency practitioner.
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Updates to this page
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Sections 1.2, 1.3, 2, 3.1, 3.2, 3.3, 4.2.2, 4.3 and 5 have been updated. The list of attribution of services incurred in connection with funded pension schemes has been removed from the page.
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Section 6, Insolvent companies added.
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First published.