HMRC confirms policy change on VAT recovery for pension investment costs

In a welcome boost for pension scheme employers, on 18 June 2025, HMRC published a policy paper which should make it easier for employers to recover VAT on investment services provided to the trustees of its occupational pension scheme.

HMRC’s previous position

For several years, HMRC’s policy on an employer’s ability to recover input VAT on services supplied to the trustees of its occupational pension scheme has been to distinguish between two types of costs – “administration” and “investment” costs.

Administration costs included costs incurred on actuarial valuations and general actuarial advice, on general legal advice and drafting, and advice on the management of the scheme such as collecting contributions and paying pensions.

Investment costs included costs of advice in connection with making investments, brokerage charges, custodian charges, and the services of a professional trustee in managing the assets of the fund.

HMRC’s previous policy – in its VAT Notice 700/17 – had been to allow employers to recover input tax on VAT incurred by trustees in relation to “administration” costs, but not “investment” costs. Where a trustee provider’s invoice included costs relating to both administration and investment services, an apportionment was needed to reflect the costs incurred for each of the services, with HMRC allowing, by way of simplification, for employers to treat 30% as relating to administration services.

In light of HMRC’s previous policy, many employers put in place creative (but legitimate) structures in an attempt to maximise their VAT recovery – such as tripartite agreements, VAT grouping and arrangements involving the pension trustees registering for VAT and supplying administration services to their employer. However, none of these solutions was perfect, and many employers simply accepted that there would be an incomplete recovery of VAT on services provided to their pension scheme.

HMRC’s new policy

HMRC’s new policy, which took effect from 18 June 2025, is that investment costs on services provided to pension trustees can be treated as the employer’s and therefore be deductible by the employer provided that the “normal” rules for VAT recovery are met.

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.

Our view – a welcome change for employers

HMRC’s policy shift is a welcome simplification in an area which has, in our view, been made more complicated than it needs to be for far too long.

It’s good news for pension scheme employers, as it should unlock greater levels of VAT recovery.

In terms of what’s next, HMRC has said it will publish guidance with more details on the policy change by autumn 2025 – so watch this space until then.