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HMRC internal manual

VAT Input Tax

Specific issues: funded pension schemes

A funded pension scheme is one in which the employer and employees’ contributions are vested in separate trustees who may be individuals or corporate bodies. It is normally separate and distinct from the employer’s business.

Most employers set up their pension funds under trust deed and the appointed trustees control the funds. Each party (the employer and the trustees) has separate responsibilities, duties and activities. Each has to consider its own ability to treat tax incurred as input tax. In running schemes various professional services are required. These might include the services of solicitors, fund managers and actuaries. In practical terms it can be difficult to decide who these services are supplied to and for the purposes of whose business they are used.

An employer may provide pensions to his employees by means of other kinds of pension schemes. For example:

  • an insurance based scheme whereby retirement benefits are secured through an insurance policy;
  • an ‘unfunded’ scheme where no specific funds are set aside to pay pensions; or
  • a scheme where the employer makes provision 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. In other words supplies are made to the employer and input tax is claimable subject to any necessary partial exemption restriction.