HMRC extend fund management VAT exemption

HMRC has  announced major policy changes concerning the VAT treatment of pension fund management and administration services.  It is good news for pension funds, but creates VAT issues for fund managers.

HMRC’s new policy has come about as a result of the much talked about ATP case heard in the Court of Justice of the European Union. “Under HMRC’s new policy, the management and administration of most defined contribution schemes is now VAT exempt,” says Robert Facer, a VAT expert at Moore Stephens. “ATP is the latest in a series of cases challenging the scope of the VAT exemption for fund management services.”

In order to achieve the VAT exempt status, HMRC has stated that pension schemes must meet four conditions:

  • the scheme must be solely funded (directly or indirectly) by the individuals who will receive the retirement benefit from the scheme;

  • the individuals must bear the investment risk (which rules out defined benefit schemes);

  • the fund must contain the pooled contributions of a number of individuals;

  • the risk borne by the pension customers must be spread over a range of securities.


“If these conditions are met, the management and administration of the defined contribution scheme can be treated as VAT exempt,” Robert says. “In addition, HMRC has stated that personal pension schemes meeting all of the above conditions can also be treated as exempt, which is again good news for such schemes.”

The policy change will mean reduced VAT costs for pension schemes meeting the above conditions. Suppliers that have previously charged VAT on services now falling within the exemption can choose to apply the new policy retrospectively, therefore allowing VAT overcharged in the past four years to be reclaimed from HMRC.

Many fund managers, at the request of their pension fund clients, have already made protective claims to maximise the impact of the four years allowed for applying the new policy retrospectively. “Such fund managers can now proceed with their claims,” Robert says. “Fund managers that haven’t yet made a claim are encouraged to do so. With HMRC’s new policy now confirmed, there’s no need to delay taking action.”

But it is not all good news. Businesses that make exempt supplies cannot reclaim all of the VAT that they incur on costs. Fund managers and other suppliers that are making exempt supplies for the first time will need to start applying the ‘partial exemption’ rules in order to determine how much VAT can be claimed. Suppliers that are already partially exempt will need to consider whether their existing procedures and partial exemption methodology need to be updated to accommodate the new rules.

One further issue which is not covered in HMRC’s guidance is the extent to which the exemption could apply to the management and administration of overseas pension schemes. The guidance suggests that such services could also be VAT exempt. This would not provide any benefit to the overseas pension scheme, as such services have always been VAT free. But it would be bad news for the UK fund manager, which would have to restrict the amount of VAT that it claims on its costs. Any businesses in this situation should consider their position carefully.

Our team of VAT specialists will be happy to advise fund managers and other suppliers on the VAT implications of the new rules.  We can also assist with submitting claims to HMRC for over charged VAT. For further advice, please get in touch.


VAT Group

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