VAT recovery on pension management costs

HMRC Brief 4 (2025) introduces significant changes to the VAT deduction rules concerning the management of pension funds, marking a pivotal development in the treatment of input tax for employers and trustees alike. This policy update reflects HMRC’'s evolving stance on the recovery of VAT incurred on costs associated with pension fund management, aligning with broader legal principles established in recent case law and European jurisprudence.

Historically, HMRC distinguished between two types of pension-related services: 

• Administration services, where employers could recover VAT as these services were considered part of the employer’s business activities 
• Investment management services, where VAT recovery was more restricted. Following the 2014 CJEU ruling in the PPG Holdings case (Fiscale Eenheid PPG Holdings BV cs te Hoogezand (C-26/12) (PPG)), HMRC changed its policy to allow employers to recover VAT on investment services only if they could prove they had contracted and paid for them

To facilitate VAT recovery, businesses used various arrangements, including pension trustees supplying services to employers and VAT grouping between employers and pension trustees. 

With these sorts of arrangements, HMRC considered there to be a dual use of costs by the employer and the fund trustees. As a result, a method of apportionment on a just and reasonable basis had to be used to determine how much input tax could be deducted by each party.   

Under the new policy, which applies from 18 June 2025, HMRC has abolished the dual-use concept for investment costs. Key changes include: 

• Full VAT recovery by employers, with all input tax on investment services now considered attributable to the employer, provided normal VAT deduction rules are met 
• Trustees can recover VAT on their costs if they are VAT-registered and supply pension management services to the employer 
• No apportionment is required, eliminating the need to split VAT between employer and trustee and simplifying compliance 

This policy change has several practical implications: 

• Increased VAT recovery, with employers now able to recover more VAT on pension-related costs, improving cash flow 
• Simplified compliance, with the removal of apportionment reducing administrative burdens and the need for complex contractual arrangements 
• Potential revisions of partial exemption special methods (PESMs), which businesses may need to change to reflect the new policy. HMRC will allow new PESMs to take effect from the start of the tax year in which they are submitted
• It is important to note that the revised rules do not negate the need for a direct and immediate link between the costs incurred and the employer’s taxable supplies.  

Businesses and pension scheme trustees should: 

• Review their current VAT recovery practices in light of the new policy. Complex contracts and group arrangements may no longer be required, and it may be more beneficial for an employer to engage investment management services to facilitate VAT recovery 
• Consider if any retrospective claims are possible where VAT recovery was previously restricted. Any claims for additional VAT recovery will be subject to the normal four-year cap 
• Assess existing partial exemption methods and consider submitting revised methods to HMRC 
• Consider the position of trustees supplying services, as they would need to be VAT-registered to benefit from input tax recovery 
• Ensure proper documentation is in place to support VAT recovery, including contracts and VAT invoices 
• Stay informed. HMRC will publish further guidance by autumn 2025 

Approval code: NTEH7062526