HMRC confirms VAT payable on contract-based pensions

Consultants that advise and assist employers with the setting up and administration of contract-based defined contribution (DC) pension schemes, including group personal pension (GPP) plans, stakeholder schemes and group self-invested personal pensions, must charge standard-rate value-added tax (VAT) to employers on services provided to them in return for consultancy charges or other fees

In its brief, VAT: Corporate pensions, HM Revenue and Customs (HMRC) confirmed that consultants and advisers in this market and employers that receive their services must be aware that fees on these services will be taxed under VAT legislation. 

The brief highlighted that while some pension consultants have charged employers for such services in the past, it appears to have been more common for them to make no charge for these services and instead rely on commission paid by the pension provider. 

However, under the Financial Services Authority’s (FSA) retail distribution review (RDR) consultants and advisers were banned from receiving commission-based remuneration from 1 January 2013.

HMRC has also advised that organisations which supply advice and assistance to employers around the implementation and ongoing administration fo contract-based DC pension schemes must establish two things to determine the VAT treatment: 

  • What is the precise nature of the service supplied?
  • Who is the recipient of that service?

Employers will normally be able to recover the VAT that is charged to them on these services as input tax, subject to partial exemption and input tax rules. 

However, the brief also stated that the VAT treatment of services provided to employees will depend upon the nature of the service provided. Even if paid for by the employer, services to employees will not generally attract input tax recovery.

The Department for Work and Pensons is currently investigating the impact of consultancy charging on pension scheme members’ pension pots.

HMRC’s brief stated: “We understand the future use of consultancy charging is still under review and the position could change going forwards. If, therefore, the nature of the services remunerated by consultancy charges changes in future and it can be demonstrated those services meet the conditions for VAT exemption outlined above, any charges made for the provision of those services will be VAT exempt.”