The VAT treatment of UK pension fund management costs has become a bit of a minefield in recent years, with a number of long-running court cases impacting on employers and pension fund trustees. In the latest twist, HMRC have now issued a Brief in response to the EU Court’s ruling in the Dutch PPG case.

HMRC have conceded that employers may be entitled to recover all of the VAT incurred on defined benefit pension fund management costs. However, their generosity is limited. The costs must be incurred by the employer and go beyond pure investment management services. In addition, if the employer recharges the costs to the pension fund it will be required to charge the fund VAT. This is likely to mean no net cash benefit to the employer or fund. Finally, the 70/30 rule that has allowed employers to recover a proportion of the VAT is being withdrawn.

The treatment of defined contribution schemes is not covered by the Brief. HMRC are waiting for the outcome of the ATP Pension Service case (which involves a Danish scheme and may result in DC management costs being exempt from VAT).

So where does this leave employers and DB scheme trustees? Possibly better off if additional VAT can now be recovered from HMRC – claims can be made for VAT that has previously been disallowed. But arrangements with investment managers and other advisers should also be reviewed to ensure that they are set up in the most VAT efficient way.