On 18 June 2025, HMRC issued Revenue & Customs Brief 4 (2025), announcing a further significant policy change in the VAT recovery position for the management of pension funds.
In summary, HMRC will no longer require VAT on asset management costs to be apportioned between the employer and pension fund, as from 18 June 2025, investment costs will not be viewed as being for dual use. Consequently, the VAT incurred will be the employer’s and so recoverable by the employer, subject to the normal VAT recovery rules.
This will be particularly relevant to and welcomed by businesses which operate defined benefit pension schemes for employees, to pension administration and asset management service providers, pension fund trustees and pension providers.
Background and historic VAT position
Historically, HMRC allowed employers funding occupational pension schemes to recover VAT they incurred on costs relating to the day-to-day administration of those funds (as business overheads), but not on costs relating to the management of investments made by the fund. In cases where a single invoice was received covering both types of cost, HMRC generally allowed a 70:30 split between investment management and administration respectively and VAT to be recovered on the 30% proportion by the employer accordingly.
However, HMRC updated its policy following the Court of Justice of the European Union (CJEU) decision in ‘Fiscale Eenheid PPG Holdings BV cs te Hoogezand (C-26/12) (PPG)’. The case itself concerned an employer’s entitlement to recover VAT paid on services relating to the administration of defined benefit pension funds and the management of the assets of the fund. The ECJ held that where there is a direct and immediate link between the pension fund costs and the employer’s business, the VAT incurred by the employer on pension fund administration and fund management is recoverable.
As this differed significantly from HMRC’s position at the time, HMRC issued Revenue and Customs Brief 43 (2014) in November 2014 to confirm that as a result of the CJEU decision, employers may recover VAT on investment costs provided they could evidence they contracted for and paid for the supply in relation to an occupational pension and were in possession of a valid VAT invoice.
HMRC policy to 17 June 2025 – dual use
Under HMRC’s policy to date, employers implemented different arrangements to achieve VAT recovery on the costs of administering occupational pension funds and managing their assets. In particular:
- the pension trustees supplying administration services to an employer; or
- VAT grouping
In both cases, HMRC considered the VAT incurred on asset management services may have a direct and immediate link to the trustee’s investment activity and the supplies made by the employer provided it was used by the employer to make those supplies. This resulted in dual use of investment costs by the employer and the trustees of the fund.
Where there was dual use of investment costs by an employer and the trustees, HMRC required a method of apportionment to be applied on a fair and reasonable basis to determine how much input tax could be deducted by each party.
New policy on dual use from 18 June 2025 onwards – key changes
As stated in Revenue & Customs Brief 4 (2025), from 18 June 2025 onwards, 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 recoverable by the employer, subject to normal VAT recovery rules. This change in approach by HMRC should simplify the VAT accounting as it will remove some of the prior complexity and could also bring significant additional VAT recovery, depending on your particular situation.
In cases where trustees are supplying pension fund management services to the employer and charging for them, they will be able to recover input tax incurred for the purpose of providing those services, provided they are VAT-registered. Any VAT recovery by the trustees will be subject to the normal 4-year recovery rules.
What is the impact on existing partial exemption methods?
Affected businesses may need to consider and propose new partial exemption special methods (PESMs) to ensure their VAT recovery reflects HMRC’s new policy. Any new PESMs approved by HMRC will take effect from the start of the tax year in which the PESM was submitted.
Application and next steps
The policy change has applied from 18 June 2025, however HMRC stated that it will publish guidance to explain the policy change by autumn 2025. Presumably, HMRC’s existing guidance at for example, VIT44600, VIT44650, VIT45420-40 will also be shortly updated accordingly.
The precise impact and VAT benefit for those businesses affected will depend on how HMRC’s policy change will be applied by HMRC in practice. For example, in which circumstances HMRC will consider supplies of administration and investment management services to be actually received by the employer itself. It will still be important for employers to demonstrate that they are the recipient of the investment services where this is the case, and to continue to ensure the contractual and invoicing arrangements fully reflect this position. Alternatively, in cases where the pension scheme is the party actually receiving and contracting for investment services, the scheme may be the one recovering the VAT instead (subject to the normal VAT rules).
It is hoped that HMRC’s further awaited guidance will be helpful, informative and will clarify any uncertainty on the above aspects to enable businesses to implement the changes easily.
In the meantime, if you are affected by these changes and would like further guidance on how the changes in this article may impact your business, please contact Lisa Burnside or your usual UHY VAT adviser.
