The UK’s tax authority, HMRC, has announced another 12-month extension to a transitional period that effectively frees defined benefit (DB) pension schemes from paying value-added tax (VAT) on investment and administration services for their assets.

This adds to the one-year transition period already granted and allows scheme sponsors to deduct the VAT charged on these services from their tax bills until 31 December 2017.

The background to the announcement is a ruling by the European Court of Justice three years ago that the investment management fees Dutch employer PPG paid on behalf of its DB schemes should be tax exempt.

Explaining why it was extending the transitional period again rather than making any more permanent change to rules, HMRC said: “It’s taking longer than expected to reconcile the court decision with pension and financial service regulations, accounting rules and emerging case law.”

It said taxpayers could continue to use the VAT treatment outlined in ‘VAT Notice 700/17: Funded Pension Schemes’ until the end of December 2017.

“Towards the end of this period, we’ll review this position and consider the need for a further extension if necessary,” HMRC said.

Ian Bell, head of pensions at consultancy RSM, said trustees of pension schemes and sponsoring employers had been anxious for further clarification from the tax authority on its policy regarding VAT recovery conditions of employers and trustees of DB pension schemes.

“When you consider that the European Court of Justice decision in PPG Holdings dates back to 18 July 2013,” he said, “it beggars belief we still do not have any definitive guidance that takes account of not only the VAT position but also contractual, regulatory, independence, accounting and direct tax issues.

“Surely it’s not beyond the wit of the Treasury and HMRC to facilitate a joined-up solution, although there could, of course, be a further underlying objective that, following the Brexit vote, delaying any decision may mean the case law never has to be implemented at all.”

Given the issues HMRC will now have to reconcile, Bell said it was unlikely any more guidance on VAT recovery of pension costs would be provided until at least autumn 2017.

“Or perhaps it is now in the long grass, never to be seen again,” he said.

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