VIT44650 | Specific issues: Funded occupational pension schemes: Effect on employers

Input tax incurred by an employer on services provided in relation to its funded occupational pension scheme will be the employer’s input tax. This input tax is considered an overhead, as it is directly linked to the employer’s business as a whole. It is therefore recoverable in full, subject to any partial exemption restrictions. This treatment is the same whether the costs incurred relate to administration or management of the scheme’s investments.

If the employer contracts directly with a provider of fund management services, then it can deduct the input tax incurred, with the normal evidential requirements, such as an invoice in its name (an invoice ‘care of’ will be acceptable for this requirement, and alternative evidence may be considered in line with guidance at VIT31200).

Invoices correctly made out to a Trustee, and not the Employer may not be re-issued to the sponsoring employer, in line with normal VAT invoicing rules. Any input tax on them is the Trustees to be deducted in line with their Partial Exemption recovery position.

If the contract for management services is between the fund manager and the trustees, then for the employer to deduct, the trustees should make a taxable charge to the employer for their services of running the scheme on the employer’s behalf. The employer will then be able to deduct input tax on this charge.

As per normal VAT rules, issuing an invoice which is not paid does not give a right to recovery. A payment must be made; an agreement to make contributions does not provide proof of payment of VAT invoices.

There are two routes for an employer to evidence that they paid the costs of running a scheme:

1. Invoices from the fund managers issued to the employer directly which they paid or deducted from the pension pot; either is acceptable as long as the employer holds an invoice and can evidence the payment; or

2. The Trustees of the scheme incurred all of the costs (unable to recover because they did not incur costs for their taxable business activity) and raise a taxable charge for managing the scheme to the employer, so that they hold a valid invoice.