In a Revenue and Customs Brief HMRC has set out its position on VAT on pension fund management costs. This follows decision of the European Court of Justice (ECJ) in the case of Fiscale Eenheid PPG Holdings BV regarding an employer’s entitlement to deduct input VAT paid on services relating to the administration and management of a defined benefit scheme. This case concerns an employer’s entitlement to deduct VAT on the costs of pension fund administration and investment management services. The Court held that, in circumstances where the employer paid those costs and did not pass them on to the pension fund, the employer was entitled to recover the VAT incurred thereon.

The ECJ decided in PPG that, an employer may deduct the input VAT it incurs on administration of a defined benefit scheme in some certain conditions. Generally, the pension scheme must be legally and financially separate from the employer, and there must be a direct and immediate link between the services supplied and the employer’s own supplies.

HMRC sets out the consequences for UK businesses. Employers will now be able to claim input VAT in circumstances in which they were previously barred from doing so. And there will be no input VAT deduction in the following situations: