VAT on UK pension costs – a welcome respite?

Back in February, HMRC issued Brief 06/14 outlining their response to the European Court decision in the PPG case. This promised a change in the long accepted practice of allowing employers to recover a proportion of VAT incurred on the administration of defined benefit pension schemes – the so-called 70/30 rule. HMRC planned to scrap this practice after a six month transitional period.

Since then we have had a decision in the ATP case which confirmed that some services provided to defined contribution schemes should properly be treated as exempt from VAT. The February brief did not cover DC schemes. In the meantime, HMRC has been in dialogue with the pensions industry to try to resolve some of the practical and cost issues arising from the February brief.

Time marches on and the end of the six month transitional period was getting closer without much clarification on how the proposed new practice on VAT recovery will work. In the nick of time, HMRC have now issued Brief 22/14 which gives some respite. While HMRC undertake a further review of how to treat pension schemes for VAT purposes, employers can continue to use the old 70/30 rule, although they can switch to a different method based on the PPG decision, presumably if it suits them better.

HMRC now expect to issue definitive guidance in the autumn (bear in mind that the Chancellor’s Autumn Statement takes place in December so “autumn” can be a long season) and will then allow a transitional period to adapt to any change in practice. This takes some of the pressure off employers and scheme trustees and is particularly welcome given all the other pension changes that are now in the pipeline, including those announced in the Budget and in last week’s Queen’s Speech.