New HMRC guidance on defined benefit pension fund VAT recovery

Why should I read this?

On 18 June 2025 HMRC published a policy paper which amended, with immediate effect, HMRC’s policy regarding the deductibility of VAT on costs relating to the asset management of investments made by occupational pension funds (investment costs).

This significant change simplified the input tax recovery process for occupational pension funds by treating all input tax incurred on investment costs as belonging to, and deductible by, the employer (subject to normal VAT deduction rules).

The change clarified and broadened the basis on which input tax may be recovered by employers from HMRC. The anticipation was that this policy change would result in improved input tax recovery in respect of future supplies and the potential for input tax claims in respect of historic supplies (subject to the normal four year restriction).

In June 2026, HMRC updated their VAT Input Tax manual following the policy change, adding new guidance which outlines the policy in more detail, and how it should be applied by employers and trustees. HMRC had previously indicated this guidance would be published by autumn 2025.

The result of this guidance is that businesses should consider what structural / contractual changes they can make in order to maximise their input tax recovery position.

What has changed?

HMRC’s historic policy was that employers could recover input tax they incurred on costs relating to the administration of their occupational pension funds, but not investment costs.

Following the CJEU decision in Fiscale Eenheid PPG Holdings BV cs te Hoogezand (C-26/12), HMRC changed its policy to allow employers recovery of input tax incurred on investment costs, provided that the employer could show evidence that they: (i) contracted for; and (ii) paid for the investment services. HMRC previously considered that there was “dual use” of investment costs by both an employer and the pension fund trustees, and HMRC therefore required a fair and reasonable apportionment method to be used to determine the amount of input tax recoverable by each party, resulting in administrative burdens and uncertain outcomes.

With effect from 18 June 2025, HMRC no longer view investment costs as being subject to dual use. HMRC now consider that all the input tax associated with both administrative and investment costs belongs to the employer and is deductible by the employer (subject to normal VAT deduction rules). This avoids the need for apportionment and represents a significant simplification of HMRC’s previous policy.

Where trustees are supplying pension fund management services to the employer and charging for them, they are now able to deduct input tax incurred for the purpose of providing those services, provided they are VAT registered. Any deductions by the trustees are subject to normal deduction rules. However, there has been some uncertainty in the market as to what employers need to show in order to deduct the VAT incurred in respect of investment costs.

After a long wait, HMRC have now updated the relevant pages of their VAT Input Tax manual which relate to funded occupational pension schemes to reflect their amended policy position. The hope was that this manual update would provide long needed clarity and it is noted that a large of amount of the previous guidance, which has been superseded by HMRC’s new policy, has been deleted, including detailed guidance on the distinction between administration and investment services and the attribution of services to administration or investment activity.

The new guidance, in particular at VIT44650, provides for the employer’s VAT recovery position in two circumstances:

• Where the employer contracts directly with the supplier of investment management services: input tax is deductible by the employer (subject to any partial exemption);
• Where the trustee contracts directly with the supplier of investment management services: for the employer to deduct, the trustees should make a taxable charge to the employer for running the scheme on the employer’s behalf, with the employer able to deduct the VAT so charged by the trustee (subject to any partial exemption).

It also states that if an invoice is made out to the trustee, then it may not be re-issued to the employer.

The new guidance then goes on to explain that there are two routes for an employer to “evidence that they paid the costs of running a scheme” (and can therefore deduct their input VAT in respect of those costs):

• invoices from the fund managers are issued to the employer directly which the employer either pays or which are deducted from the pension pot; either is acceptable as long as the employer holds an invoice and can evidence the payment; or
• the trustees of the scheme incurred all of the costs and raise a taxable charge for managing the scheme to the employer, so that the employer holds a valid VAT invoice.

Accordingly, it appears that HMRC consider that for the investment costs to be deductible by the employer, they are required to have contracted for and paid for the relevant services. This appears to be in line with HMRC’s previous position (as set out the previous version of VIT44650). As the new guidance is silent as to whether these “new” rules apply to administration or investment costs, it is arguable that employers may be in a worse position than they were prior to the issue of this new guidance. This is because the now archived VIT44700 provided for employers to recover input tax in respect of administration services even “where the trustee contracts and pays for the services supplied” provided that the “employers hold tax invoices made out in their own name”.

The new guidance seems to suggest that HMRC are taking the position that either the employer needs to contract for all fund management services (i.e. both administration and investment services) in order to deduct the VAT, or structuring needs to take place in order to put the employer in the right position.

What should I do?

Employers and pension fund trustees should carefully review HMRC’s new guidance (which is somewhat confusing) and consider its application to their VAT recoverability position. The VAT treatment of pension fund costs remains a complicated and fact-specific area, therefore employers and trustees should seek professional advice where needed. Businesses should consider whether it is possible to put in place arrangements between the employers and the trustees in order to maximise their recoverability position.

Employers which have not yet done so may be able to make claims for additional input tax in respect of historic supplies of investment management services (subject to the usual four year time limit), but consideration should be given to whether or not they can evidence that they contracted directly with the provider of fund management services.

Businesses should also review their existing partial exemption special methods (PESMs) in light of HMRC’s updated policy and consider whether they need to propose new PESMs. HMRC have confirmed that any new PESMs which are approved by HMRC will take effect from the start of the tax year in which the PESM is submitted.

For more information

If you have any questions in relation to HMRC’s new policy and its potential impact on your business, please do not hesitate to get in touch with any of the Eversheds Sutherland contacts set out below.

We can advise you on:

• how HMRC’s new policy and the updated guidance may affect your VAT recoverability position;
• any adjustments which may be required to your existing PESMs; and
• whether you may be able to claim input tax from HMRC in respect of historic supplies, and the method for doing so.