HMRC extend transitional period for employer funded pension VAT costs

HMRC have announced an extension to 31 December 2017 of the transitional period allowing employers to take advantage of the 70:30 basis of recovering input VAT associated with occupational pension schemes.


Changes made to HM Revenue & Customs (HMRC) Manuals in November 2017 make it clear that the existing option to recover input VAT in relation to employer funded pension costs on the basis of a 70:30 split between investment services and administration will continue to be available and will not now be withdrawn from 01 January 2018 (see VIT44600).HMRC guidance in the VAT Input Tax (VIT) Manual notes that “in consideration of the difficulties encountered by some taxpayers with implementing options that would allow appropriate deduction of VAT as per PPG, HMRC has come to the view that the existing rules for input tax deduction will continue to be available to taxpayers going forward, together with the newer options following “. For further details on the background to the changes, see HMRC’s new policy on VAT and pension schemes.

HMRC has announced a further extension to the transitional period allowing employers to take advantage of 70:30 basis of recovering input VAT associated with occupational pension schemes. Pending further guidance from HMRC on this topic, businesses will be allowed to use the 70:30 basis until 31 December 2017, if they so choose.


In Revenue & Customs Brief 43/2014, HMRC accepted that their previous 70:30 policy on VAT recovery in relation to employer funded pension services was incorrect. However, to enable a transitional period to allow businesses to adapt to the change in policy, HMRC decided to continue to allow businesses to use the 70:30 split until 31 December 2015. That was later extended to 31 December 2016 by Revenue & Customs Brief 17/2015.

Revenue & Customs Brief 14/2016 now announces a further extension of that transitional period until 31 December 2017. The new announcement notes that it is taking longer than expected to reconcile recent court decisions on the correct VAT treatment of employer funded pension costs with pension and financial service regulations and accounting rules. As a result, it has been decided to extend the transitional period for a further 12 months. This means that taxpayers may continue to use the VAT treatment outlined in VAT Notice 700/17: Funded Pension Schemes until 31 December 2017. HMRC note that they will, towards the end of this period, review this position and consider the need for a further extension if necessary.

New contractual arrangements

The announcement also notes that some taxpayers have made changes to their structure and/or contractual arrangements to comply with the recent court decisions. However, HMRC will allow such businesses to choose to revert back to the previous 70:30 treatment during the transitional period.

The guidance that HMRC was intending to publish on possible options for recovery has currently been put on hold whilst they fully consider the wider implications of the options being proposed. In the meantime, VAT can be recovered on fund management costs in line with the guidance laid out in the previous Revenue & Customs Briefs. For further details of this guidance, see “HMRC’s new policy on VAT and pension schemes” and “Defined benefit pension schemes: employer input VAT”. However, the announcement contains a warning that taxpayers should be aware that adopting alternative structures to comply with the VAT requirements could have wider implications, in particular in respect of regulatory requirements and corporation tax deductions.

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