1. Funded Pension schemes — an overview

1.1 Information in this notice

This notice provides guidance about claiming input tax on funded pension scheme expenditure for both employers and trustees.

1.2 Definition of a funded pension scheme

A funded pension scheme is anone arrangementin thatwhich promisesthe membersemployer a pension benefit and isemployees’ typically established under trust.

Employers and employees will usually contribute towards the scheme. These contributions are heldvested onin trust and managed by separate trustees,trustees. whoThese trustees may be individuals or corporate bodies. The scheme andis its assets are normally separate and distinct from the employer’s business.

1.3 Purpose of the special rules for funded pension schemes

Most employers set up their pension schemefunds under trust deed and the appointed trustees control the funds. Each party (the employer and the trustees) has separate responsibilities, duties and activities. They each musthave to consider their own ability to treat tax incurred as input tax. In running schemes various professional services are required (for example, solicitors, fund managers, actuaries). In practical terms it can be difficult to decide both:

This

• to noticewhich explainsperson howthese andservices whenare employerssupplied
• for andthe trusteespurposes canof claimwhich inputperson’s taxbusiness inthey relationare toused

This fundednotice pensionexplains schemes.our view on these issues.

1.4 Other kinds of pension schemes

An employer may provide pensions to his employees by means of one of the following:

• an insurance based scheme where retirement benefits are secured through an insurance policy
• an ‘unfunded’ scheme where no specific funds are set aside to pay pensions
• a scheme where the employer provides for the payment of pensions by a segregated reserve fund in the balance sheet, represented by specific assets

In these cases,cases the normal VAT rules apply. Supplies are made to the employer who can claim input tax subject to any necessary partial exemption restriction.

1.5 If you make exempt supplies

Where you make exempt supplies the amount of input tax you can deduct may be restricted. You’re entitled to deduct the input tax incurred on costs that you use or intend to use in making taxable supplies.

You cannot normally deduct input tax incurred on costs that relate to your exempt supplies. If your input tax relates to both taxable and exempt supplies, you can normally deduct only the amount of input tax that relates to your taxable supplies. You can find more information in Notice 706: partial exemption.

2. Guidance for employers about claiming input tax

2.1 Pension scheme activity that forms part of your business activities

The management of your own employee pension scheme is a part of your normal business activities. If you’re a VAT-registered employer, and set up a pension schemefund for your employees under a trust deed, the VAT incurred in both setting up the schemefund and on its day-to-day management is your input tax. This applies even where responsibility for the general management of the scheme rests (under the trust deed) with the trustee, or the trustees pay for the services supplied. A clear distinction is, however, made between ‘management’ and ‘investment’ costs.

2.2 Pension scheme activity that does not form part of your business activities

When the trustees make investments, acquire property orand collect rentrents from property holdings, these activities are all treatedtermed as ‘investment’ activities for the purposes of this notice. YouThese canactivities alsoare treatquite theseparate inputfrom your business. This means that the tax incurred onin thesecarrying on investment activities asis not your input tax. This applies even if you pay such expenses on behalf of the trust.

2.22.3 Types of ‘management’ services that you can claim input tax on

You can claim for:

• making arrangements for setting up a pension schemefund
• management of the scheme, that is collection of contributions and payment of pensions
• advice on reviewing the scheme and implementing changes to it
• accountancy and auditing relating to management of the scheme, such as preparation of the annual accounts
• actuarial valuation of the assets of a fund
• general actuarial advice connected with administration of the fund
• providing general statistics in connection with the performance of a fund’s investments or properties
• legal instructions and general legal advice, including drafting trust deeds, insofar as it relates to the management of the scheme

2.32.4 Types of ‘investment’ services you cancannot claim input tax on

You cancannot claim for:

• advice connected with making investments
• brokerage charges
• rent and service charge collection for property holdings
• producing records and accounts in connection with property purchases, lettings and disposals or investments
• trustee services, that is services of a professional trustee in managing the assets of the fund
• legal services paid on behalf of representative beneficiaries in connection with changes in pension schemefund arrangements
• custodian charges

2.42.5 Evidence you need to claim input tax

You should hold tax invoices made out in your name. If the trustees pay for the supplies on your behalf, you should arrange for the suppliers to make out the invoices in your name.

2.52.6 If you’re reimbursed by the trustees or charge them for costs you incur in managing the pension scheme

If the management services are of the kind described in sectionsparagraph 2.2 and 2.3 then you should not charge output tax. This is because these costs are treated as your own business costs. You must account for output tax where similar arrangements are adopted for servicesservices:

• consisting of investment advice
• connected with the pension scheme’sfund’s own business activities.
  activities

2.62.7 If a third party manages the scheme

A fund manager, property manager or professional trustee may be appointed to manage the scheme. Usually,Usually their charges will cover both management as well as investment services.services You can deductproper to the inputtrust. taxYou incurredonly onreceive investment and administrationthe management services providedfor bythe apurposes fundof manager.your business. Therefore, you can only treat the tax connected with the management of the scheme as your input tax.

If the supplier issues a single tax-inclusivetax inclusive invoice for both kinds of services, you canwill deducthave to split the inputcosts taxbetween relatingmanagement toand investment services. You may, by way of a simplification agreed with the investmentsector, andtreat 30% of the costs as for management services inwhen full.a Thisthird isparty providedboth:

• provides that the invoicepension isfund’s inmanagement yourand nameinvestment andservices
• issues a single tax invoice

If you believe that 30% is subjectnot toa anyfair partialproportion exemptionof restrictionsthe incosts place.for Theremanagement isservices, noyou’ll longerhave ato requirementprovide evidence to HMRC to support this view.

The supplier may themselves apportion dual-usetheir costssupply between youinvestment and management services and issue separate invoices. When this happens you should treat the trusteeswhole of the pensiontax scheme.incurred on management services as input tax.

IfIt may be that to apply 30% of the costs to management services will not give a fair and reasonable result if you claim input tax on a:

• separate invoice isfor inmanagement services
• single invoice for both management and investment services

When the nameresult of the trustee,apportionment theyis cannot deductfair theyou inputmust taxuse (seean sectionalternative 3.3).method. However, ifThe alternative method should reflect the trusteeproportion makesof athe taxablesupply chargeattributable to you formanagement theirservices. managementYou ofshould yourprovide pensionevidence scheme,to youHMRC canto deduct inputsupport tax onthe thatalternative charge.method.

Further information on attributing services between ‘management’ and ‘investment’ is given in section 5.

2.72.8 Pensions provided for the employees of more than one employer

This sectionparagraph does not apply where employers are members of the same VAT group registration — see section 4.

Some pension schemesfunds provide pensions for the employees of several employers who may have a commercial link or be entirely separate from each other. In such cases each employer can only treat as input tax that proportion of the management services proper to their own employees.

Where a person supplying management services to the fund issues a single invoice, either one of the employers or the trustee (in the case of entirely separate employers) may act as paymaster. The paymaster can treat all the VAT on management services as input tax if they recharge each of the other employers with their share of the costs plus VAT.

A person acting as paymaster must issue a VAT invoice to each of the respective employers. They can then treat the tax as their input tax.

2.82.9 If you cease to be in business

If you cease trading, and therefore cease to be an employer, you no longer have any entitlement to input tax relatingon tomanagement of the pension scheme. But where the trustees are themselves VAT-registered on account of business activities carried out by the pension scheme they may treat the tax incurred on services connected with the continuing management of the scheme as their input tax, subject to the normal rules. This means that where the trustees are required to restrict recovery of input tax because they make exempt supplies not all the tax on the management services may be recovered — see sectionparagraph 1.5.

Where a professional trustee is appointed to run a pension scheme, for example where the sponsoring employer ceases to exist, VAT incurred on the management of the pension schemesfund can only be recovered by the trustee insofar as it is a clear cost component of an onward supply of that management of the pension scheme.fund.

3. Guidance for trustees about claiming input tax

3.1 Find out if you need to be VAT-registered

A pension schemefund has no legal status in itself being represented by its trustees. If you are the trustee of a schemefund and it makes taxable supplies, for example it’s waived exemption in relation to supplies of property, you must consider whether you need to be VAT-registered.

3.2 Services you can claim input tax on

If you are VAT-registered you can treat VAT incurred on goods and services used, or to be used, for the purposes of your business as input tax. VAT on supplies connected with the management of a pension scheme is normally not your input tax (see(but sectionsee 2.8paragraph 2.9 where an employer has ceased business). This is because these supplies are primarily regarded as being the responsibility of the employer.

This is also the case with supplies connected to the investments of the pension scheme. You can only treat VAT incurred as your input tax if you can provide evidence (such as VAT invoices in your name) that the services have been supplied to you. Where you make exempt supplies your recovery of input tax may be restricted — see sectionparagraph 1.5.

3.3 If a third party manages the scheme

IfAs theexplained invoicein isparagraph in2.7 yourwe name,will, youas cana deductsimplification agreed with the inputsector, taxaccept ifthat the70% thirdof partythese doesservices bothare investment services supplied for the purposes of the following:trustee’s activities if a third party both:

• provides management and investment services
• issues only one inclusive invoice

IfAny theclaim invoicethat this is innot thean nameaccurate ofapportionment the employer, you will notneed be entitled to deductbe thesupported inputby taxsuitable (see section 2.6).evidence.

4. Group registrations and pension schemes

4.1 Including a sole trustee of a fund in a VAT group registration

A sole trustee of a fund may be included in a VAT group registration with the employer, provided it is a corporate body (see Notice 700/2: group and divisional registration.

4.2 Effect of a corporate trustee being included in a group registration

This has implications for both your outputs and inputs.

4.2.1 Outputs

When a corporate trustee is included in a VAT group registration, any business supplies made by the trustee are treated as being made by the representative member. This includes the trustee dealing in the assets of the fund.

4.2.2 Inputs

Tax incurred on supplies to the trustee can be treated as received by the representative member.

If the fund provides pensions for employees of companies outside the VAT group, any VAT incurred on management of the scheme for those companies is not treated as being for the purposes of the representative member’s business. Tax incurred should be apportioned so that only so much as relates to group members is treated as received by the representative member. Alternatively,Alternatively the representative member may elect to use the paymaster arrangement — see sectionparagraph 2.7.2.8.

VAT incurred by group members is recoverable by the representative member if it is attributable to supplies made to persons outside the group which carry the right to deduct input tax. Any non-business and exempt supplies made by the employer or trustee must be taken into account when considering VAT recovery.

4.3 Corporate trustee liability for meeting VAT debts of the representative member

Normally all group members are jointly and severally liable for tax due from the representative member. In the case of a corporate trustee however, we are advised that this liability does not extend to the assets of any trust, for example a pension schemefund of which the corporate trustee is the trustee, except to the extent the group VAT debt is attributable in whole or in part to the administration of the trust.

5. Attribution of services incurred in connection with funded pension schemes

This list sets out our view of how services incurred in connection with funded pension schemes are to be attributed for VAT purposes:

Services	Attribution
	Management	Investment
Regular meetings with clients	Yes	Yes
Regular meetings with consulting actuaries	Yes	—
Cash management	Yes	Yes
Investment management — asset allocation and stock selection	—	Yes
Investment research, including relevant travel — UK and overseas	—	Yes
Economic research, including relevant travel — UK and overseas	—	Yes
Dealing in securities in UK and overseas markets on behalf of clients	—	Yes
Keeping detailed accounts of all investments, receipts, disbursements other transactions	—	Yes
Review and control of investment portfolios	—	Yes
Preparation of contract notes	—	Yes
Preparation of performance statistics	Yes	Yes
Preparation of schedules of transactions	—	Yes
Preparation of specialist market commentaries	—	Yes
Preparation of valuations	Yes	Yes
Submission of data to independent performances monitoring service	Yes	—
Safekeeping of property and securities in own name or name of nominee or in bearer form	—	Yes
Appointment of and responsibility for sub-custodians domestic or foreign	—	Yes
Provision of nominee service	—	Yes
Maintenance of securities accounts, stock registration and transfer	—	Yes
Collection of dividends and interest and obtaining new coupon sheets	—	Yes
Recovery of tax	—	Yes
Administration in respect of, capital repayments, and capitalization issues	—	Yes
Administration in respect of company meetings and, in particular, executive of forms of proxy as appropriate, conversions, exchanges, liquidation, distributions, redemptions, right issues and payment of calls	—	Yes
Programming and provision of relevant computer support for investment management and investment administration and control	—	Yes
Programming and provision of relevant computer support for valuations and performance statistics.	Yes	—

6. Insolvent companies

Where a company is being wound up but still exists as a legal entity, and is still receiving supplies for which it’s liable for VAT, then VAT on those supplies is deductible under the provisions of Section 94 of the VAT Act 1994. This includes VAT on costs incurred in winding up the company’s occupational pension scheme.

Where the VAT deductible on such supplies exceeds the output tax owed by the company to HMRC for the relevant period, the company may reclaim the balance of the VAT deductible for that period through the office of its insolvency practitioner.

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