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HMRC internal manual

VAT Government and Public Bodies

Section 33 bodies: local authorities: local authority pension funds

Local authority pension funds are usually similar to sole trustee schemes (see VATGPB4260). The assets of the fund are vested in the authority and the fund’s activities cannot be separated from the other activities of the authority. Consequently any exempt input tax incurred, such as that relating to investments, is included when the authority calculates whether it has exceeded the 5% insignificance test (see VATGPB4510). Where it does it will lose all its exempt input tax.

Unlike other employers local authorities may be prevented by legislation from setting up a separate trust to administer their pension fund. This means the exempt input tax from investment activities will be aggregated with their other exempt input tax, making it likely that they will exceed the 5% de minimis limit. This puts them at a disadvantage compared to private companies whose pension funds are separate from their VAT registration.

The ‘administering authority’ is obliged by legislation to run the pension scheme on behalf of the member authorities. It cannot avoid this responsibility unless it can find another authority willing to take over the running of the scheme. Obviously, given the tax disadvantage, other authorities are unlikely to be willing to take this on.