Employers can now recover all VAT on DB pension fund management costs
From 18 June 2025, HMRC will no longer take the “dual use” approach, which has been HMRC policy to date restricting recovery by employers of input VAT on DB fund management costs.
What is the new HMRC policy?
As set out in a policy paper published by HMRC on 18 June 2025, all input VAT incurred on both the administration and investment services relating to DB pension funds will be seen as the employer’s and deductible by the employer, subject to normal rules.
Any claims for retrospective recovery of input VAT will be subject to the normal four-year limit.
The pension industry, and in particular employers with occupational DB pension schemes, has long been waiting for HMRC to update its position regarding the recovery of VAT on pension fund management costs. This is of importance for service providers, trustees and sponsoring employers of DB pension schemes.
What was previous HMRC policy?
In Case C-26/12 PPG Holdings BV (“PPG”), the Court of Justice of the European Union held that an employer could deduct VAT paid on both administration and fund management services, so long as there was a “direct and immediate link” between those services and the employer’s own supplies. HMRC has been wrestling with the implications of this decision for its policy on VAT and pension schemes, issuing sporadic updates over the course of 2014.
In Revenue and Customs Brief 43 (2014): VAT on pension fund management costs, issued on 25 November 2014, HMRC accepted as a result of PPG that there were no longer grounds to differentiate between the administration of a pension scheme and the management of its assets. The test would be the same in both cases: the employer may be able to deduct input VAT if it received the supply of services. Unfortunately, HMRC also tightened its approach to what this test entails and developed the “dual use” approach regarding investment costs. HMRC policy to date included agreeing that:
- employers were permitted to deduct input VAT on pension administration services; and
- employers may be able to deduct input VAT on both pension administration services and pension investment services (provided certain arrangements were in place) but input VAT regarding investment services was restricted on the grounds that there was dual use of investment services by the employer(s) and trustee(s). Therefore, a method of apportionment on a fair and reasonable basis was required to be used to determine how much input VAT on investment services could be deducted by the employer.
What is the effect of the new HMRC policy?
The new HMRC policy means that sponsoring employers of DB schemes should be able to recover all input VAT under normal rules, incurred on both administration and investment services relating to these schemes. This is the case, provided the right contractual and invoicing arrangements are in place. In particular, it will be important that the contract between the trustee(s) and the sponsoring employer demonstrates that it is a contract for services for the management and operation of the scheme, and not merely an on-charging arrangement in relation to the service provider’s fees paid by the trustee(s).
This new policy applies immediately (from 18 June 2025) but further guidance to “explain” the policy change is expected in autumn of this year.
CMS Comment
In order to take full advantage of this new development, potentially impacted trustees, pension service providers and employers should review their contractual and invoicing arrangements and consider whether these now enable, or require any changes to achieve, a better input VAT deduction position in light of the new HMRC policy.
We also recommend, where applicable, protective claims for retrospective recovery of input VAT are submitted without delay.
For further information please contact the authors of this article or your usual CMS tax or pensions contact.
Co-authored by Marek Lukasik.
