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HMRC internal manual

VAT Government and Public Bodies

Section 33 bodies: local authorities: background to pension funds generally

To understand local authority pension funds it is necessary to have a basic appreciation of how pension funds normally operate. What follows is a simple summary.

It is usual for an employer to separate a pension fund from their business activities, usually by appointing trustees.

Separate trustees

Where the trustees are separate from the business the VAT treatment is as follows.

Administration of the scheme

The day-to-day management of a pension scheme is part of an employer’s business so any VAT incurred on goods or services is reclaimable as input tax subject to the normal rules.

If a scheme provides pensions for the employees of other businesses any VAT incurred has to be apportioned between the respective employers. However, special arrangements allow for one of the participating employers to recover the VAT, provided they undertake to recharge each of the other employers with their share of the costs and VAT. This is commonly called the ‘paymaster arrangement’.

Investment advice

The making of investments is a business activity of the Trustees. Any VAT incurred on goods or services relating to this activity is therefore proper to the Trustees of the fund and is deductible by them, subject to the normal rules. This is so even if there is more than one employer participating in the scheme because the investment activities are nevertheless carried on by the Trustees, rather than the employers.

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Sole trustee

If the employer is the sole trustee of the pension fund then their business and trustee activities are indivisible for VAT purposes. VAT on both the management of the scheme and on any investment activities is reclaimable subject to the normal rules. This means that if either the business or the scheme makes exempt supplies, the amount of input tax that can be deducted may be restricted by the partial exemption rules.