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HMRC internal manual

VAT Input Tax

Specific issues: funded occupational pension schemes

Employers often provide funded occupational pension schemes which may be a defined contribution scheme (also known as money purchase), a defined benefit scheme, or a hybrid scheme with features of both.  A funded occupational pension scheme is one in which the contributions are vested in a trust.

Normal input tax rules apply to costs relating to running pension schemes. However, because there are normally at least two recipients of supplies, additional complexities can arise. Each party (the employer and the trustees) have separate responsibilities, duties and undertake different activities. Each has to consider its own entitlement to treat VAT incurred as its 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 by whom they are used.

An employer may also provide pensions to his employees by means of personal pension schemes. These may also be established under a trust, or may be contract based.

Following the CJEU decision in Fiscale Eenheid PPG Holdings BV cs te Hoogezand (c-26/12) (PPG) HMRC announced changes to the UK rules on input deduction in respect of funded, trust based occupational pension schemes. There was a transitional period, running from 3rd February 2014 when HMRC first announced the policy change until 31st December 2017, during which time taxpayers could continue using the old rules whilst a review was carried out.   Following the review and in consideration of the difficulties encountered by some taxpayers with implementing options that would allow appropriate deduction of VAT as per PPG, HMRC has come to the view that the existing rules for input tax deduction will continue to be available to taxpayers going forward, together with the newer options following PPG. Which option is applied will depend on whether the employer does or does not directly contract and pay for the services used to run the pension scheme. 

The following guidance on pension schemes outlines both rules that can be used for services used to run an occupational pension scheme where an employer does not directly contract and pay for those services; and rules that apply following the judgment in PPG that can only be used for services received by an employer who directly contracts and pays for them.