Employers are being urged to read HM Revenue and Customs’ finalised guidance on VAT on pension scheme costs, as they may be able to maximise the VAT they can recover.

HMRC changed its approach to VAT on pension scheme costs following the Court of Justice of the European Union PPG litigation case in 2013. However, at the time it gave a four year transitional window, which closes on 31 December 2017. It has recently published new information on its treatment of VAT on pension scheme costs.

The two key points from the updated guidance are that HMRC will continue to allow employers to use the existing basis for VAT recovery after 31 December 2017, including the 70-30 per cent split.

Secondly, it confirms the understanding of the other structures that are available for employers who may be able to recover more VAT relating to investment services as a result of PPG. Those structures are VATR grouping and trustees’ supply services.

Commenting, Gowling WLG director Chris Stiles’ explained: “It looks as if we may now have all the guidance from HMRC that we are going to get, so after four years of wait-and-see, now is a good time for employers and trustees to make a decision on the right approach for them. For those who simply want to carry on with the status quo, there is good news: the updated HMRC manual confirms that the existing rules for input tax deduction will continue to be available.”

However, he said employers and trustees should note that they now have other options. For example, employers who pay investment management costs under a tripartite contract will be able to recover VAT on them – although for many, the corporation tax consequences may make this unattractive.

“There are pros and cons with all these structures, and employers and trustees should use whichever best fits their circumstances. We expect that many will simply continue with the status quo. However, all employers and trustees should at least consider the point with their advisers to ensure that they are paying and recovering the right amount of VAT,” he added.

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