Scrutton Bland’s VAT expert,
Paula Mason explores the most recent updates to HMRC policies and case laws and the impact these may have on your VAT liabilities.
Change in HMRC Policy in relation to Defined Benefit Pension Schemes.
HMRC published a Policy Paper on 18 June 2025 in relation to VAT deduction in the management of pension funds. Here we
take a look at the background to this subject and what is changing.
HMRC have always considered costs for occupational pension schemes to fall into two groups:
a. Setting up and day-to-day administration costs – covering such things as management of the scheme, accountancy, audit and legal fees, actuarial valuations and general actuarial advice connected with the administration of the scheme.
b. Investment Management costs relating to the assets – covering such things as investment advice and brokerage, custodian fees, etc.
Prior to 2014, HMRC
allowed employers to recover VAT incurred under a) above, on the basis that they were overhead costs of the employer and therefore had a direct and immediate link to the employer’s business activities.
But they
did not allow VAT recovery under b) above as they considered these to relate solely to the activities of the pension scheme.
Where invoices were received covering both administration and investment management costs, as a simplification measure, HMRC only allowed the employer to recover 30% of the VAT relating to the administration costs. With the other 70% relating to the investment management costs (only recoverable by the pension scheme if registered for VAT and according to normal deduction rules).
However, due to a European Court of Justice (ECJ) case decided in 2014 concerning PPG, a Dutch Company, HMRC changed their policy.
PPG received supplies of services from third parties in relation to both the administration and investment management of assets of its defined benefit pension scheme. PPG paid for these services and did not pass on the costs to the pension fund.
It was decided that PPG was entitled to recover the VAT incurred provided there was a direct and immediate link between the services and PPG’s taxable supplies.
As a result of this case,
HMRC accepted that there was no need to differentiate between administration and investment management costs, and that employers could recover VAT in full on both types of costs if there was evidence that:
- The services were provided to the employer,
- The employer was party to the contract for those services,
- And the employer paid for the services.
Where the pension scheme received these services, HMRC allowed a transitional period until 31 December 2015 which was in turn extended to 31 December 2016 and then again to 31 December 2017. This allowed time for businesses to adapt to the change in policy whereby the employer and the pension scheme could continue a 30/70 split of the VAT.
Following this, where either trustees of pension schemes contracted with employers to provide services of running the pension scheme (including both administration and investment management services) – or in pension schemes with corporate trustees entered into VAT groups with employers – HMRC was of the view that the services were used by both employers and trustees. Therefore requiring them to apportion the investment management services between them on a fair and reasonable basis, with the portion belonging to the trustees being disallowable.
Employers could not therefore recover the VAT on the investment management services in full using these methods.
However, HMRC have recently announced that with effect from 18 June 2025, where the two methods above are in use, they no longer require the investment management services to be apportioned between employers and trustees.
All such services can be treated as the employer’s costs and that they can recover the VAT in full, subject to normal deduction rules. HMRC are publishing further guidance in relation to this change in policy in the autumn.
The VAT impact of the announcement
After the PPG decision and the previous change in HMRC policy, even though it was possible for employers to recover input tax incurred on investment costs – if they contracted and paid for these services – it was not possible for them to recharge these costs on to the pension schemes without charging VAT. Resulting in a VAT cost where the schemes were not VAT registered.
They were able to recharge the administration costs, if invoiced separately, without VAT as these were not considered a supply for VAT purposes.
As HMRC are now of the opinion that the
investment management costs can, like the administration costs,
be treated as the employer’s business costs, we assume that any recharge of these costs
post 18 June 2025 will also
no longer be considered a taxable supply for VAT purposes.
As HMRC have stated that claims for additional input tax will be subject to the normal 4-year cap, this allows the
opportunity for all costs to be redirected to the pension schemes going back through this period. And, where splits are still being used,
additional VAT being recovered by employers for the pension schemes share, where the schemes are not VAT registered.
Changes Proposed for the Capital Goods Scheme
HMRC announced at the end of April 2025 that to reduce the administrative burden on small businesses, the
current threshold relating to land and buildings of £250,000 or more excluding VAT will be increased to £600,000 or more excluding VAT.
Additionally,
computers and computer equipment will be removed from qualifying assets covered by the scheme. No date has been given for these changes to be effective but the government has stated that it will be “in this Parliament”.
VAT Caselaw Updates
Yorkshire Agricultural Society (YAS) and HMRC Upper Tribunal Decision
Having comprehensively covered this case in our
Spring 2025 VAT Quarterly Update, HMRC have now confirmed in Revenue & Customs Brief 3 (2025) that
they will not be seeking to appeal the decision.
This confirmation provides the clarity that
charities and other qualifying bodies needed to take up the
opportunity of reclaiming VAT paid on income received from fundraising events held in the last 4 years. As this income can now be treated as VAT exempt providing the following conditions are met:
- The event aligns with the charity/qualifying body’s main objectives
- The main aim of the event is to raise funds
- All marketing materials (e.g. website, programmes) clearly show the main aim of the event
Solent Pathway Campus Limited v HMRC [2025] TC 09536
This First Tier Tribunal (FTT) case concerned a joint venture between Solent University and a third-party course provider QAHE (Solent) Ltd known as Solent Pathway Campus Limited (SPCL).
SPCL made supplies of pre-degree courses to overseas students to provide them with the requisite skills to undertake a UK undergraduate degree course. Once the course was completed, the student gained a qualification and they were entitled to join an undergraduate course at Solent University.
SPCL submitted an Error Correction Notice to HMRC
claiming back overpaid VAT on the basis that their supplies were of exempt education. HMRC refused the claim on the basis that they were not an ‘eligible body’. SPCL appealed to the FTT.
Item 1 of Sch 9, Group 6, VATA 1994 exempts the provision by an eligible body of education or vocational training with an
eligible body being defined as a UK university and any college, institution, school or hall of such a university.
SPCL claimed that they were a college of Solent University but if the FTT did not agree with that, they claimed they were an eligible body on the basis that they made supplies of teaching of English as a foreign language (TEFL). They stated their
supplies were a single composite supply with the predominant element being TEFL and therefore the supplies are exempt. HMRC claimed that SPCL were not an eligible body under either of these claims.
The appeal was allowed on the following grounds:
- There was a common understanding that SPCL was a college of the University.
- The contractual framework had been established so that the students of SPCL were students of the University.
- The students are generally treated as students of the University during the course of their period of study.
- SPCL provides courses of study which are approved by the University.
- SPCL can present its students for examination for a degree from the University.
- SPCL is a college of the University due to the evident relationship between the students and the University and the degree to which the activities of SPCL are recognised by and integrated with the University.
The FTT was of the opinion that if they were wrong on their analysis of SPCL being a college of the University, they would have allowed the appeal on the basis that the
courses provided were supplies of TEFL and therefore exempt under Item 1 of Sch 9, Group 6, VATA 1994.
We’re here to help
To discuss any of the topics covered in this update, or for VAT advice that’s specific to you and your business, contact
Paula or one of the tax team on 0330 058 6559 or email hello@scruttonbland.co.uk
