Updated HMRC VAT guidance on employer pension costs

HMRC has announced a change of policy in relation to the recovery of input VAT by employers in relation to pension scheme costs. In particular, Revenue and Customs Brief 4 (2025) announces that HMRC will no longer require an apportionment of VAT incurred on asset management costs seen has having a dual use between the employer and pension fund. Under the new policy, which applies from 18 June 2025, 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 deductible by the employer, subject to normal deduction rules.

HMRC's current guidance on employer funded pension costs is contained in the VAT Input Tax Manual at VIT44600 et seq. The Brief suggests that this guidance will be updated to reflect the new policy in autumn 2025. Until then, questions will likely remain about the scope of the new policy. In particular, since the policy is subject to "normal deduction rules", it seems clear that any employer will still need to ensure that it can demonstrate that it is the recipient of the relevant supplies in a way which is acceptable to HMRC. As such, whilst the announcement is certainly a welcome development, there will remain some uncertainty around the policy.

Background

In 2014, HMRC announced in Revenue & Customs Brief 43/2014 that they would, in principle, allow input VAT recovery where an employer received a supply of pension fund administration or investment management. Historically, HMRC took the view that where an employer funds an occupational pension scheme, it was necessary to distinguish between the costs of setting up and day to day administration of the scheme and the payment for the (usually sub-contracted) management of the investment activities of the fund. HMRC accepted that the former amounted to deductible overheads of the employer's business for VAT purposes, but considered that any VAT on supplies of investment management services to the scheme related solely to the activities of the pension scheme and could not be deducted by the employer. Where a single invoice was received, covering both administration and investment management, HMRC would in general allow a 70:30 split (70 per cent investment management, 30 per cent administration).

In Fiscale Eenheid PPG Holdings, the ECJ held that, provided a direct and immediate link exists between the pension fund costs and the employer's business, then input VAT incurred by the employer on pension fund administration and fund management would be deductible. HMRC accepted that this decision required a change in policy, with the updated policy published in in Revenue and Customs Brief 43 (2014).  HMRC accepted that where an employer pays for and receives a supply in relation to an occupational pension, then the employer may be able to recover that input VAT. In particular, in a significant change of policy, HMRC accepted that "there are no grounds to differentiate between the administration of a pension scheme and the management of its assets". Accordingly, provided that the employer can show that it is the recipient of the supply, it will be entitled to input VAT credit.

In this context, the Brief indicated that it will be important for an employer to obtain "contemporaneous evidence that the services are provided to the employer". At minimum, this will require the employer to be a party to the contract for the relevant pension services and also to pay for the services. More detailed guidance was subsequently published in the VAT Input Tax manual. 

Updated policy

Revenue and Customs Brief 4 (2025) notes that different arrangements have been put in place for employers to achieve VAT deduction for the costs of administering occupational pension funds and managing their assets. Those arrangements include:

• the pension trustees supply administration services to an employer
• VAT grouping.

In both arrangements, 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 is 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. HMRC policy until now is that where there was dual use of investment costs by an employer and the trustees, a method of apportionment on a fair and reasonable basis to determine how much input tax could be deducted by each party was required. 

The guidance on VAT grouping and attribution of input VAT can be seen at VIT45440 which states: "The cost of administration and other general scheme related services that do not have a direct and immediate link to the management of the pension scheme's assets and therefore the scheme's investment activity, will be overhead costs of the VAT group and will be deductible in accordance with the activities of the group as a whole. However, investment services incurred for the scheme's investment activity will have a direct and immediate link both to that investment activity and also the supplies of the employer. This means that any VAT deduction in respect of the VAT incurred on these services will need to reflect this dual use and be apportioned between the different activities on a fair and reasonable basis."

The new Revenue and Customs Brief announces that 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 deductible by the employer, subject to normal deduction rules.

In addition, where trustees are supplying pension fund management services to the employer and charging for them, they will also be able to deduct input tax incurred for the purpose of providing those services, provided they are VAT registered. Any deductions by the trustees will be subject to  normal deduction rules.

Comment

The new policy will be applied from 18 June 2025. However, the Brief appears to recognise that back claims may be made for input VAT recovery, subject to the normal 4-year cap. As such, it is not entirely clear whether HMRC see this change in policy as rectifying an error, entitling affected taxpayers to adjust their VAT recovery position for previous years on the basis of the new policy.

The Brief also notes that businesses may need to propose new partial exemption special methods to align their VAT recovery with the new policy

Ultimately, much will depend on how the new policy is applied in practice by HMRC and some doubts may remain as to the circumstances in which HMRC will accept that supplies of administration and investment management are actually received by the employer (rather than the fund itself).

If you would like to speak to us about a potential VAT reclaim under this new policy please contact Jo Crookshank or your usual Simmons contact.