HMRC Brief – update to VAT recovery position of pension fund management costs

HMRC’s historic position has been that employers could recover VAT incurred on costs relating to pension fund administration services, but not those related to the management of investments.

Following a European Court decision, HMRC changed its policy to allow employers to recover VAT incurred on investment costs, provided the employer could evidence that it contracted and paid for the investment services.

Arrangements could be put in place for employers to achieve VAT deduction, including the trustees supplying administration services to the employer and VAT grouping. Where there was dual use of investment costs by an employer and the trustees, a fair and reasonable method of apportionment could be used to determine how much VAT was deductible by each party.

From 18 June 2025, HMRC will no longer view investment costs as being subject to dual use and all the associated VAT incurred will be seen as the employer’s and recoverable by the employer, subject to the usual rules for VAT deduction.

In addition, where trustees are supplying pension fund management services to the employer and a charge is made, they will also be able to deduct VAT incurred for the purpose of providing those services, again subject to the usual rules for VAT deduction.

Any Partial Exemption Special Methods currently in place may need to be updated to account of the changes.

Claims can be made for additional recoverable VAT, subject to the usual four-year cap.