Key policy change to VAT deduction on pension fund investment costs
Robin Prince · Posted on: June 25th 2025 · read
On 18 June 2025, HMRC published a Revenue and Customs Brief announcing a significant policy change aimed at relaxing the VAT recovery rules for employers incurring VAT on investment costs relating to their occupational pension schemes, such as defined benefit arrangements.
In this article, Robin Prince and Michael Samuel-Bryan examine the implications of this change and the opportunities it presents for affected businesses.
Background
Historically, employers have suffered restriction on the recovery of VAT incurred on costs associated with the investment activities of a pension scheme, while retaining the right to recover VAT on the administration costs of the scheme. In cases where employers engaged third parties to manage their pension scheme, HMRC regarded the input VAT incurred as having a direct and immediate link to both the trustee's investment activities and the supplies made by the employer. Consequently, HMRC determined that only the administration services incurred were for the purposes of the employer's business, allowing only this portion to be treated as input tax.
Employers who received single invoices for both investment and administration services were required make an apportionment to account for the 'dual use' by both the employer and the trustees of the scheme.
It was agreed, as a simplification, that 30% could be attributed to the administration services and considered input tax for the employer, while the remaining 70% was associated with the investment services and deemed irrecoverable.
New Policy
Effective from 18 June 2025, HMRC will no longer regard investment costs as being subject to 'dual use'. As a result, all input tax associated with the pension scheme will be treated as incurred for the purposes of the employer's business, making all the input tax deductible by the employer under normal VAT rules.
Furthermore, in instances where trustees provide pension fund management services to the employer for a fee, the input tax incurred will also be deemed attributable to the employer and recoverable under normal VAT rules.
Opportunities
Businesses that have previously restricted input VAT recovery on their costs may now have the opportunity to claim the additional input VAT incurred on pension costs from prior periods. HMRC permits businesses to make claims over the past four years.
Partially exempt businesses with an agreed Partial Exemption Special Method with HMRC will need to ensure that their methods are consistent with the VAT recovery position of the new policy and consider whether a new method will need to be negotiated with HMRC.
Get in touch with our VAT team
If your business is impacted by this policy change, our experienced VAT team is available to discuss the opportunities this presents and can assist in facilitating backdated claims.
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