In a significant change for employers sponsoring occupational pension schemes, HMRC has announced a new policy enabling employers to claim back all VAT on pension scheme investment costs.[1] The new policy applies to investment costs where the employer has directly paid these costs, such as contracting directly with an investment management provider or, and also where the employer reimburses the trustee for any investment costs. This update, effective from 18 June 2025, marks a notable shift from previous VAT treatment.
Background: the previous VAT regime
Historically, HMRC only allowed employers to recover VAT incurred on the administration of occupational pension schemes, not on the asset management of investments made by the scheme. This distinction was based on the belief that administration costs were business overheads with a direct link to the employer’s business activities.
The position changed in 2014 following the Court of Justice of the European Union’s (CJEU) decision in PPG. The PPG case concerned a Dutch employer, PPG Holdings BV, which sponsored an occupational pension scheme. PPG sought to recover VAT it had incurred on services relating to both the investment management and administration of the pension scheme. The CJEU held that an employer could recover VAT on services relating to the management of a pension scheme, provided there was a “direct and immediate link” between the employer’s activities and the services received. Crucially, the CJEU found that such services were part of the employer’s general overheads where the employer funded the scheme as part of its business obligations. As a result, HMRC changed its policy and allowed the employer to recover input tax incurred on investment costs where it could show a ‘direct and immediate link’ and that it contracted and paid for the investment services.
Post-PPG, HMRC also introduced some flexibility allowing employers to recover VAT on investment costs for pension schemes, provided they could show that such costs had a dual benefit for both the employer and the pension scheme trustee. Where there was a ‘dual purpose’, VAT recovery on investment costs required a fair and reasonable apportionment between the employer and the trustees, often creating complexity and administrative burden.
The new policy: full VAT deduction for employers
The new HMRC policy removes the concept of dual purpose from investment costs. All VAT incurred on pension scheme investment management is now considered attributable solely to the employer, making it fully recoverable (subject to the usual VAT deduction rules). Employers no longer need to apportion investment VAT costs between themselves and the trustees.
Additionally, where trustees supply pension fund management services to employers and charge for them, they can also deduct input tax incurred for the provision of those services, provided they are VAT-registered. Both employers and trustees must continue to follow normal VAT deduction rules.
What does this mean for employers?
- Simplified VAT reclaim: The need for complex apportionment calculations is eliminated.
- Broader VAT recovery: Employers can now claim all VAT incurred on investment costs, not just administrative costs.
- Potential for retrospective claims: Businesses that, under the previous rules, limited their VAT recovery can now submit retrospective claims for qualifying costs incurred within the last four years. This could result in substantial refunds and is an important step that employers may wish to pursue.
- Partial exemption adjustments: Businesses using partial exemption special methods (PESMs) may need to revise their PESMs to align with the updated policy. Any new PESMs approved by HMRC will take effect from the start of the tax year in which they are submitted.
Next steps and further guidance
HMRC has indicated it will publish further guidance by autumn 2025 detailing the implications and practical steps for compliance. In the interim, employers and trustees should review their current arrangements and consider whether changes to their VAT recovery methods or PESMs are required.
Conclusion
HMRC’s update represents a positive simplification for employers sponsoring occupational pension schemes, reducing administrative burdens and potentially leading to significant VAT savings on pension investment costs. Businesses are advised to review their VAT recovery processes in order to make the most of this change to HMRC policy.
[1] https://www.gov.uk/government/publications/revenue-and-customs-brief-4-2025-vat-deduction-on-the-management-of-pension-funds/vat-deduction-on-the-management-of-pension-funds
