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Good News for Pension Fund Employers: HMRC mark a new era for Pension Investment Cost Recovery

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On 18 June 2025, HMRC released its Revenue and Customs Brief 4 (2025), marking an important change in how VAT on pension scheme investment costs is treated. This long-awaited update simplifies the VAT recovery process for employers and trustees involved in managing their pension schemes.

Employers can now fully recover VAT on investment management costs related to occupational pension schemes. 

This blog looks at what the position was on VAT recovery prior to the HMRC Brief, and suggests actions Pension Fund Employers may wish to take now. 

Key Changes

Previously, HMRC policy was that employers could recover VAT for costs related to the administration of their occupational pension schemes, on the basis that these were business overheads and had a direct and immediate link to the employer’s business activities. However, pension scheme “investment management costs” were treated differently and have been trickier for employers to recover VAT on – prior to 2014, they were not eligible for recovery by the employer at all.

In 2014 that HMRC policy changed in light of a decision in the CJEU. From 2014 on costs incurred by the employer in relation to the asset management of pension fund investments were eligible for recovery where dual use of investment costs by an employer and the trustees could be evidenced. Where there was such “dual use”, the trustees and employer had to apportion the costs between them on a “fair and reasonable” basis to work out how much input tax could be recovered by each.

In order to evidence the required dual use of investment costs, the parties used complicated arrangements such as tripartite contracts, VAT grouping and management service agreements.

From 18 June 2025, HMRC has introduced a simplified VAT policy for pension schemes. HMRC Guidance is expected by Autumn 2025 and the key changes are:

  • Full VAT recovery: Employers can now treat all VAT on investment management services for occupational pension schemes as their own input tax—recoverable under normal VAT rules (depending on whether the costs relate to taxable or exempt activities) – in the same way as for costs related to the administration of schemes.
  • No more dual use: HMRC has removed the previous requirement to split VAT recovery in relation to pension fund investment costs between employers and trustees. This change simplifies administrative processes and compliance by treating the services as used solely by the employer.
  • Trustee recovery: VAT-registered trustees can also reclaim VAT on their costs if they make taxable supplies (e.g. charging the employer for managing the scheme).
  • Backdated claims: Businesses that previously restricted VAT recovery under the old rules may now submit claims for eligible costs incurred in the past four years, potentially unlocking significant refunds. This is a key action that some Pension Fund Employers may want to consider taking. 
  • Review exemption methods: Organisations may need to revisit and revise their partial exemption special methods (PESMs) to ensure they align with the new VAT treatment and maximise recovery.

Good News for Employers

Employers funding DB pension schemes can now simplify their VAT compliance processes and reclaim potentially significant historic VAT, if they meet the requirements. Previous HMRC options to facilitate recovery were often administratively burdensome and legally complex. Now, employers  can recover all VAT on investment costs linked to pension funds, subject to standard input tax rules. 

This policy change represents a welcome simplification in an area long fraught with complexity. For employers and trustees, it’s time to reassess their VAT strategy and take advantage of the new rules.

This article was written by Alex Bones, trainee solicitor and Chris Brown, Partner, in the Burges Salmon Pensions and Lifetime Savings Team. 

For advice on the new policy for VAT deduction on the management of pension funds, please contact Chris Brown or any member of Burges Salmon’s Pensions and Lifetime Savings Team

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.

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