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HMRC internal manual

VAT Input Tax

HM Revenue & Customs
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Specific issues: employers with funded pension schemes

Managing an employee pension scheme is part of the employer’s normal business activities. A VAT registered employer with a pension fund for employees under a trust deed can treat VAT incurred in setting up the fund as its input tax. It can also treat VAT incurred on its day-to-day administration, otherwise known as management services, as its input tax.

This applies even where the trustee is responsible for the general management of the scheme under the trust deed or where the trustee pays for the services supplied. However, a clear distinction is made between management and investment costs. This is because the fund itself is not a part of the employer’s business activities.

The trustee may make investments, acquire property and collect rents from property holdings. These activities, otherwise known as investment services, are quite separate from the employer’s business. It follows that tax incurred in carrying on investment activities is not the employer’s input tax even if they pay such expenses on behalf of the trust.

Management services include:

  • making arrangements for setting up a pension fund;
  • management of the scheme, that is collection of contributions and payment of pensions;
  • advice on reviewing the scheme and implementing changes to it;
  • accountancy and auditing relating to management of the scheme, such as preparation of the annual accounts;
  • actuarial valuation of the assets of a fund;
  • general actuarial advice connected with administration of the fund;
  • providing general statistics in connection with the performance of a fund’s investments or properties; and
  • legal instructions and general legal advice, including drafting trust deeds, insofar as it relates to the management of the scheme.

Investment services include:

  • advice connected with making investments;
  • brokerage charges;
  • rent and service charge collection for property holdings;
  • producing records and accounts in connection with property purchases, lettings and disposals or investments;
  • trustee services, that is services of a professional trustee in managing the assets of the fund;
  • legal services paid on behalf of representative beneficiaries in connection with changes in pension fund arrangements; and
  • custodian charges.

Employers should hold tax invoices made out in their own name. Trustees who pay for supplies on behalf of the employer should arrange for invoices to be made out by the supplier in the name of the employer.