HMRC Announces Full VAT Recovery on Pension Scheme Investment Costs

HMRC has from 18 June 2025 announced a significant change in its approach to VAT recovery on UK occupational pension scheme investment costs. In practice, this primarily impacts defined benefit schemes.

The revised approach should remove any need for employers to apportion the cost of investment services between themselves and pension scheme trustees, providing a clearer and simpler path to VAT recovery.

Background

Historically, HMRC allowed employers to recover input tax on costs relating to the administration of pension schemes (such as actuarial, legal and audit services) but not to the management of their investments (such as investment advice and brokerage, custodian and even professional trustee services).

In 2013 the European Court seemed to negate that distinction by ruling in favour of VAT recovery wherever a “direct and immediate link” existed between pension services and an employer’s business. HMRC's interpretation of this ruling was narrower, though. As refined over time it allowed employers to recover VAT on investment services:

1. where employers contracted directly with service providers and paid for the services themselves (including under a "tripartite contract" that included the trustees);
2. where trustees contracted to provide a service to the employers of running the pension scheme (covering both administration and investment services); or
3. where a scheme's corporate trustee entered into a VAT group with the employers.

In the second and third of these three principal scenarios, HMRC took the view that investment services were "dual use" (i.e. shared) and that input tax should be apportioned on a "fair and reasonable basis" between employers and trustees, so that employers could at best make a partial recovery.

Under the new policy, which in effect revises the tax treatment of arrangements falling within the second and third scenarios, HMRC say they 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". Also, it is confirmed that VAT-registered trustees can recover VAT on their costs where they make taxable supplies (e.g. charging the employer for scheme management).

What Next?

HMRC guidance is expected in autumn 2025 to explain this revised policy further. Some employers will be keen to move quickly on this, but care (and specialist advice) should still be taken:-

• in some cases, significant revision of existing arrangements may seem desirable, subject of course to a cost-benefit analysis and consideration of the legal, regulatory and tax positions;
• at least until further guidance is available, it seems prudent to check that documentation records the provision of services to the employers (to meet the ECJ's test) and not merely the passing-on of costs; and
• HMRC say their new policy "will apply from 18 June 2025" but add that "claims for additional input tax will be subject to the normal 4-year cap" suggesting that retrospective claims might be an option for some (and if so, these should obviously be lodged at the first opportunity).

If you would like to discuss any of the issues raised in this blog, please contact a member of the pensions team or your usual Brodies contact.