HMRC have published 'Revenue and Customs Brief 4 (2025): VAT on the management of pension funds', which announces a further change to HMRC's policy on the recovery of VAT incurred on the management of pension funds.
Background
- Historically, employers could Recover VAT on the administration costs of occupational pension funds, but the VAT on costs of asset management was not recoverable.
- Following the Court of Justice of the European Union (CJEU) decision in 'Fiscale Eenheid PPG Holdings BV cs te Hoogezand (C-26/12)', HMRC allowed employers to recover VAT incurred on investment costs, provided that the employer could show evidence that they contracted and paid for the investment services.
- Different arrangements were put in place for the VAT recovery on the costs of administering occupational pension funds and managing their assets, including:
- The pension trustees supply administration services to an employer.
- VAT grouping.
- HMRC considered that the VAT incurred may have a direct and immediate link to the trustee's investment activity and the supplies made by the employer, resulting in dual use of investment costs by the employer and the trustees of the fund.
Previous policy
HMRC's previous policy was that where there was dual use of investment costs by an employer and the trustees, a method of apportionment on a fair and reasonable basis was required to determine how much VAT was recoverable by each party.
HMRC's new policy
From 18 June 2025, HMRC will no longer view investment costs as being dual use, meaning that VAT incurred will be recoverable by the employer.
- Trustees supplying pension fund management services to the employer will also be able to recover the VAT incurred on providing those services if they are VAT registered.
- This is subject to normal VAT rules and the four-year cap.
Impact on partial exemption methods
- Businesses may need to propose new Partial Exemption Special Methods (PESMs).
- Any new PESMs approved by HMRC will take effect from the start of the tax year in which the PESM was submitted.
- Guidance on how to seek approval can be found at Appendix 2 of Partial exmption (VAT Notice 706).
Additional information
HMRC will publish guidance to explain the policy change by autumn 2025.
Useful guides on this topic
Input VAT: What constitutes a valid claim (& VAT invoice)?
What is Input VAT? Who can claim it? What is needed for a valid claim? What needs to be included on a VAT invoice and can you make a claim without one?
Groups (VAT)
What are the conditions for forming a VAT group? What rules apply once a VAT group is in place?
How to register for VAT online (taxpayers)
How do I register for VAT and file my VAT return online?
Partial exemption & input VAT
How do you calculate the amount of input tax you can recover under the VAT partial exemption rules? What are the de minimis rules?
External links
HMRC: Revenue and Customs Brief 4 (2025): VAT deduction on the management of pension funds