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HMRC internal manual

VAT Government and Public Bodies

Section 33 bodies: local authorities: pension expenses

Administration expenses

Local authorities are not disadvantaged by the rules concerning administration expenses. Their recovery should therefore be broadly in line with that of other pension scheme providers. The position as it applies to the authority’s own employees, along with those of other authorities and non-authorities, is as follows.

Administration free of charge:

If the authority administers the scheme free of charge then this is a non-business activity and it may recover the related VAT under section 33.

Administration charge to other authorities

If the authority charges other authorities (scheduled bodies) who are obliged to remain within the scheme for administration, this is also a non-business activity and the VAT incurred is likewise recoverable under section 33.

Administration charge to admitted bodies

If the authority charges admitted bodies it will be operating under a special legal regime for administering pensions on behalf of those bodies and the charge will be non-business.

Investment expenses

For the reasons described at VATGPB4270 local authorities are disadvantaged because the making of investments is undertaken by them and not by a separate legal entity. The VAT incurred on these activities, much of which will be exempt input tax, therefore ‘sticks’ with the administering authority significantly increasing their overall level of exempt input tax. If the authority remains within the insignificance test (see VATGPB4510)it will be able to recover this VAT. However, if the level of exempt input tax incurred pushes the authority over its de minimis limits it will lose all its exempt input tax.

We have received representations that the investment activities of authorities should be treated as a non-business activity. When considering the liability of the investment activity the normal business/non-business rules are applied. These rules are not specific to authorities and there is no special treatment for authorities. Similarly their section 33 status does not provide for special treatment in this case. Therefore, whether an investment activity is business or non-business, will be judged according to the rules as they apply to other businesses.

The general approach is to accept the investment activities undertaken by pension funds as being carried on in the course and furtherance of a business. But we will consider representations from an authority that believes it can demonstrate some non-business investment activities.