Pension fund VAT recovery rules: HMRC provides further guidance

Following their initial announcement last summer, HMRC has now provided further guidance in relation to their relaxation of the recovery of VAT by organisations on the costs of their Defined Benefit pension schemes.

In Revenue and Customs Brief 4 (2025), HMRC noted a change to its policy and now accepts that the sponsoring employer (as opposed to the pension scheme) is, in principle, entitled to recover VAT on costs associated with the pension scheme’s investment activities. HMRC has expanded on this in a June 2026 update to the guidance contained in its internal manuals. The two sets of guidance issued over the last 12 months mark a change from HMRC’s prior approach, which treated the recovery of VAT on administration and investment costs differently. 

The new policy has effect from June 2025, and organisations and their Defined Benefit pension schemes should assess whether HMRC’s change in position is either a threat preventing the recovery of VAT previously reclaimed, or an opportunity to increase the overall amount of VAT they recover. 

The key parts of HMRC’s new guidance are:

• The historic policy, as set out in Revenue and Customs Brief 43 (2014), no longer applies, and HMRC will no longer view investment costs as being subject to dual use. Instead, all the associated input tax incurred will be seen as the employer’s and deductible by the employer, subject to normal deduction rules. However, HMRC does acknowledge that there are circumstances where this VAT can be recovered by the trustees.
• The changes, therefore, open an opportunity for sponsoring employers to reclaim more VAT, which will be particularly beneficial where the sponsoring employer has a higher VAT recover rate than the pension trustees. HMRC’s guidance gives their views on how the employer should evidence that it is entitled to reclaim the VAT, and a key requirement is that it receives a VAT invoice addressed to it.
• Trustees who are VAT registered and charge the employer for the pension fund management services they provide will also be able to deduct input tax on investment costs, provided the services were supplied to them if they received these services for their business activities. Any deductions by the trustees will be subject to the normal deduction rules. Consequently, those taxpayers who apply partial exemption and or non-business restriction would likely use current methods to appropriately restrict claims.
• Whilst it is not explicitly set out in HMRC’s guidance, it is implied that trustees who do not make onward pension fund management charges to the sponsoring employer are unlikely to be able to reclaim all, if any, of the VAT they incur if their investment activities do not give rise to an economic activity or lead to VAT-exempt supplies. 

The VAT rules for pension schemes have been difficult to navigate for several years, and there is potentially more litigation to come when determining the VAT that can be reclaimed by the pension scheme and by the sponsoring employer. 

In line with the ‘normal’ rules for VAT recovery, it will still be necessary for organisations to demonstrate that the sponsoring employer is the recipient of the investment services on which it is seeking to reclaim VAT, so care will be needed with contractual and invoicing arrangements. Employers with the right fact pattern and supporting evidence should explore the opportunity to make a retrospective claim if they’ve not done so already. 

For employers and pension schemes where the pension scheme has a higher VAT recovery rate than the employer, it may be more beneficial for the pension scheme to continue to be the one receiving the investment services and recovering VAT, but this will only be a viable option where the pension scheme’s activities give rise to an economic activity and supplies which carry an entitlement to VAT recovery. 

For further guidance on how this change could impact your organisation, please get in touch with your usual Crowe contact.