VIT44750 | Specific issues: Funded occupational pension schemes: Effect of VAT Grouping

A corporate trustee of a pension scheme can, as the legal representative of that pension scheme, VAT group with an employer provided they meet the eligibility criteria set out in section 43A of the Value Added Tax Act 1994 (see chapter 2 of VAT Notice 700/2: group and divisional registration for further guidance). In those circumstances, any supplies made by the trustee, including dealing in the assets of the scheme’s fund(s), are treated as being made by the representative member of the VAT group.

The cost of services incurred for the administration and investment activities of the scheme will be overhead costs of the VAT group and will be deductible in accordance with the activities of the group as a whole subject to the partial exemption method in place.

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

A scheme that is a member of the VAT group (through its corporate trustee) may provide pensions on behalf of employees of companies that are not members of the VAT group. If it does not make a supply for consideration to those companies in respect of these services, then any VAT incurred on managing of the scheme for those companies is not incurred for the purpose of the representative member’s business. To the extent costs are used for those purposes, the VAT incurred is not input tax. Tax incurred by the VAT group should accordingly be apportioned so that only so much as relates to group members is treated as the group’s input tax, unless the representative member acts as paymaster for the group.

Businesses have raised concerns that the effect of the joint and several liability provisions relating to VAT grouping mean that where a corporate trustee is VAT grouped, HMRC would be entitled to recover a VAT debt of the VAT group from the pension scheme assets. Our position is, and remains, that we are unable to recover VAT from the scheme assets except to the extent that the relevant VAT debt is attributable to the administration and operations of the pension scheme.

It remains the case that all group members are jointly and severally liable for tax due from the representative member. However, in the case of a corporate trustee this liability does not extend to the assets of any fund(s) that they are responsible for managing as these are not the trustee’s assets and cannot be used to pay debts that are not the result of the trustees fulfilling their duties as trustees.

More information about VAT Grouping can be found in the VAT Grouping manual.