Corporate & Commercial Insights: The HMRC Update on Recovering VAT Occupational Pension Scheme Investment Costs – What Does This Mean for Employers?

Lauren Prince, Summer Intern

Lauren is entering into the final year of her undergraduate degree at the University of Cambridge, where she is a student of History and French. She is committed to addressing inequality in its many forms and has particularly valued contributing to our Sexual Misconduct in Spiritual Communities practice during her time with us.

Having come into action on 18 June 2025, the government’s policy update on VAT deduction on the management of pension funds marks a significant change from previous policies. HMRC’s latest policy allows employers to claim back all VAT on pension scheme investment costs where the employer has directly paid these costs.

Previous policies

Historically, employers were able to recover any input tax they incurred on costs linked to the administration of their occupational pension funds. However, they could not recover those related to the asset management of investments made by the fund.

This changed following the Court of Justice of the European Union (CJEU) decision in ‘Fiscale Eenheid PPG Holdings BV cs te Hoogezand (C-26/12)’. After this, HMRC allowed employers to reclaim VAT incurred on any investment costs, as long as the employer was able to provide evidence that it was the employer who both contracted and paid for these investment services.

VAT recovery on the costs of administering occupational pension funds, and managing their assets were covered by alternate arrangements, including:

• The pension trustees supply administration services to an employer
• VAT grouping

Before the most recent policy, HMRC would use a method of apportionment to determine how much input tax could be deducted by each party where there was dual use of investment costs by an employer and the trustees.

Updated VAT policy

This simplified policy eliminates the concept of investment costs being subject to dual use. Now, all associated input tax will be regarded as the employer’s and thus deductible by the employer, subject to standard deduction rules. Additionally, trustees will be able to deduct input tax that they incur for the purpose of providing these services when supplying pension fund management services to the employer and charging for them. There is now no issue of dual use and all input tax incurred will be seen as the employers and hence deductible by the employer subject to normal rules.

What is the impact upon employers?

• Potential partial exemption adjustments: To align their VAT recovery with the new policy, it may be necessary for businesses to propose new partial exemption special methods (PESMs). All new PESMs approved by HMRC will come into effect from the start of the tax year in which the PESM was submitted.
• Possibility for retrospective claims: Under the previous rules, businesses may have been limited in their VAT recovery. However, they can now submit retrospective claims for qualifying costs induced within the past four years – a key step in which employers may receive substantial refunds.
• Simplified VAT reclaim process: This updated policy removes the need for complicated and difficult apportionment calculations.
• More comprehensive VAT recovery: It is now possible for employers to claim all VAT incurred on investment costs, rather than just administrative costs.

Conclusion

HMRC has stated that there will be further guidance by Autumn 2025 to detail further ramifications and practical ways to comply with the policy. This simplification in HMRC’s VAT policy has the potential to save employers notable VAT sums on pension investment costs.