Effective from 18 June 2025, the update allows employers to fully recover VAT on both invested and administration costs related to pension funds, eliminating the previous requirement to apportion costs between employers and pension funds trustees.
Who does this impact?
This change impacts businesses and other taxable entities that provide pension funds for their employees, as they can now simplify their VAT accounting and potentially increase VAT recoverability.
It also affects pension administration and asset management service providers, who may need to adjust their VAT recovery processes.
Additionally, pension fund trustees and pension providers are impacted as they may now be able to claim VAT on services supplied to employers.
Historic VAT treatment of pension fund costs
Historically, HMRC permitted employers to reclaim input VAT they incurred on costs related to the administration of their occupational pension funds, but excluded costs associated with the asset management of the fund’s investments.
However, following a ruling by the Court of Justice of the European Union (CJEU), HMRC revised its stance. This allowed employers to recover input VAT on investment-related costs, provided they could demonstrate they contracted and paid for the investment services.
HMRC recognised that VAT incurred on asset management services could be directly linked to both the investment activities carried out by pension fund trustees and the taxable supplies made by the employer - provided the employer used those services in making such supplies. This led to a scenario where investment costs were shared by the employer and the trustees, resulting in dual usage.
Where there was dual use of investment costs, a method of apportionment on a fair and reasonable basis was required to determine how much input tax each party could recover.
HMRC’s new policy
HMRC no longer treats investment costs as being shared between employers and trustees. Under the change of policy, all input VAT incurred on these costs will be regarded as solely the employer’s and may be recovered by them, subject to normal deduction rules.
If trustees are providing pension fund management services to the employer and charging for those services, they too (subject to standard deduction rules) may recover input tax incurred for delivering those services, provided they are VAT-registered.
Impact of changes
The changes are of particular benefit to employers operating Defined Benefits (DB) schemes for their employees, with the potential for full VAT recovery on investment costs.
HMRC has also indicated that retrospective claims up to 4 years can be made for VAT restricted on investment costs, where these supplies have been received by the employer.
Next steps for employers and trustees
Employers with a DB pension scheme and pension trustees supplying pension fund management services to the employer, should review their current VAT recovery position in light of the changes.
Please contact our VAT specialists in Armstrong Watson’s VAT team if you require any support with dealing with the new VAT changes and potentially making a 4 year reclaim
