HMRC changes its stance on pension schemes and VAT following EU court ruling

HM Revenue and Customs has changed its policy on the recovery of input tax in relation to the management of pension schemes, following a decision by the European Union Court of Justice.

Last week, HMRC issued a four-page brief, VAT on Pension Fund Management Costs, in which it acknowledged there were circumstances in which employers could claim input tax in relation to pension schemes.

Previously, employers could only deduct this as long as the employer, and not the pension scheme was the recipient of services supplied, and that the employer had paid for the services.

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This meant that employers would be charged VAT for services on pension schemes, where a third party provided management services for the funds.

This was challenged successfully in the European Court of Justice by Danish pension provider ATP Pension Services, which earlier this year won its case against its tax authority, after claiming it should not be charging its clients VAT for its services.

It told the court that defined contribution schemes, unlike defined benefit schemes, shared enough characteristics with Ucits funds and special investment funds to receive similar tax treatment.

The ECJ ruled that a DC pension scheme could be a SIF, and therefore VAT exemption could apply to its management costs.

Following this ruling, HMRC has revised its guidance, stating that qualifying UK pension funds could be considered SIFs.

The note also urged employers to review their stance in light of the guidance. According to the brief, defined benefit schemes may need to revisit the structure of key contact,s while DC schemes may have opened the door to VAT-exemption and for some employers to reclaim for past periods.

Adviser view

Ian Bell, head of pensions for London-based Baker Tilly, said: “Schemes should ensure that their providers have made claims to HMRC, to protect their position, for the VAT they have been charged in the past four years.”