Amendment to VAT recovery rules on the management of pension funds
HMRC has announced a relaxation to its approach to the recovery of VAT by organisations on the costs of their Defined Benefit pension schemes.
In Revenue and Customs Brief 4 (2025), HMRC has 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.
This marks a change from HMRC’s prior approach, which treated the recovery of VAT on administration and investment costs differently. The new policy applies from 18 June 2025.
New VAT recovery rules
The key parts of HMRC’s new guidance are:
“The historic policy, as set out in Revenue and Customs Brief 43 (2014), will no longer apply 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.
In addition, 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.
Application to employers and their pension schemes
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. However, HMRC’s revised position will be welcomed as it removes a layer of complexity.
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.
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. HMRC’s brief does not comment on this situation, and we wait to see if any further guidance will be issued.
For further guidance on how this change could impact your organisation, please contact Robert Marchant, Kieran Smith, or your usual Crowe contact.