New VAT deduction rules for defined pension funds
24 June 2025| CATEGORIES: New VAT policy, Pension fund costs, VAT deduction| TAGS: investment costs, New HMRC rules, pension funds, VAT
HM Revenue & Customs (HMRC) has published Revenue & Customs Brief 4 (2025): VAT deduction on the management of pension funds. The Brief provides details of an important policy change to VAT deduction rules in relation to pension fund costs.
Background
Prior to 2014, employers were allowed to recover VAT on administration of pension schemes—but not on VAT paid for investment management services.
In 2014, HMRC aligned with the CJEU’s decision in PPG Holdings BV (C‑26/12), permitting employers to reclaim VAT on investment services—if they had contracted and paid for them directly. This case concerned an employer’s entitlement to deduct VAT paid on services relating to the administration of defined benefit pension funds and the management of the assets of the fund.
Different arrangements were 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.
This dual use meant an apportionment of investment costs on a fair and reasonable basis was required in order to determine how much input tax could be deducted by each party.
New policy
HMRC confirm in the Brief that from 18 June 2025:
- Investment costs will no longer be viewed as subject to dual use. All input tax on investment costs will now be deemed as relating solely to the employer and recoverable by the employer, subject to normal deduction rules.
- Also, 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.
Any claims for additional input tax will be subject to the normal 4-year cap.
Implications for partial exemption methods
Businesses may need to propose new partial exemption special methods (PESMs) to align their VAT recovery with the new policy. Any new PESMs approved by HMRC will take effect from the start of the tax year in which the PESM was submitted.
HMRC have confirmed that new guidance to explain the policy change will be published by Autumn 2025. Whilst this announcement is a welcome development and should simplify VAT accounting relating to pension scheme costs, some uncertainty around the policy exists. The new guidance will hopefully provide further clarity.