In this article David Reaney and Emma Robinson explore HMRC’s change in policy regarding VAT deductibility on the management of pension funds, as outlined in Revenue and Customs Brief 4(2025). Detailed guidance is expected in the Autumn, but businesses should review their position now and consider whether a protective claim should be submitted.
Overview
In a significant and helpful move to clarify the VAT treatment of costs related to the management of pension funds, just before the summer HMRC introduced Revenue and Customs Brief 4 (2025). Effective from 18 June 2025, this Brief outlines the new approach and provides guidance on how employers can recover VAT on investment management costs.
This article highlights the key aspects of the Brief and its implications for employers and pension schemes.
The Brief aims to provide a clear framework for recovering VAT on investment management costs, ensuring that employers and trustees can navigate the process with greater certainty. However, the Brief ends with HMRC stating that it “will publish guidance to explain the policy change by autumn 2025”.
Therefore, whilst some of the clarity is yet to come, this change is significant and may present an opportunity for employers to revisit the past treatment of relevant costs and potentially make a claim to recover additional input tax retrospectively, within the normal 4 year cap.
HMRC’s previous policy
HMRC’s previous policy allowed employers with occupational pension schemes to claim part of the VAT on investment costs where there was dual use by an employer and the trustees.
HMRC required a fair and reasonable apportionment to be made to determine each party’s input tax deduction. This typically led to the employer only being able to recover part of the VAT being incurred as some was attributable to the trustees.
As a result of the CJEU decision in Fiscale Eenheid PPG Holdings BV cs te Hoogezand (C-26/12) HMRC allowed employers to recover input VAT on investment costs if they could evidence that they had contracted for and paid for the investment services.
This led to changes being introduced by many employers including the trustees providing services to the employer and VAT grouping. HMRC’s view of these arrangements was that a dual use of the costs occurred.
HMRC’s new policy
HMRC has now changed its view on investment costs and no longer considers them to be subject to dual use between the employer and the trustees. Instead, the Brief states that all input tax incurred on investment costs is to be seen as the employer’s and deductible by the employer, subject to the normal rules of input tax deduction.
HMRC’s landing page for the Brief states, ‘Employers can now claim back all the VAT on investment costs linked to pension funds. They no longer need to split the costs with pension trustees. If trustees are providing pension fund management services and charging the employer, they can also claim back VAT on their costs, as long as they’re VAT-registered. Both must still follow the usual VAT rules.’
Key points to consider
Conclusion
Revenue and Customs Brief 4 (2025) represents a significant step forward in clarifying the VAT treatment of pension scheme costs, which has been an evolving area over the last 10-15 years and it should simplify the approach to input tax recovery for employers. While the policy change is welcome, the detail of HMRC’s position is still awaited, in particular around the interpretation of the phrase ‘subject to the normal deduction rules’. As a result, some uncertainty remains.
Businesses should revisit the approach they have taken to VAT recovery on investment costs over the last four years to
- consider whether there is an opportunity to submit a protective claim for previously under recovered input tax, including claims which rely on a generous interpretation of the phrase ‘subject to normal deduction rules’, and
- assess whether the current structure is the optimum structure based on the new policy position.
This article originally appeared in TaxPoint, Chartered Accountants Ireland (September 2025) and is reproduced here with their kind permission.
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If you have any queries on the treatment of VAT in pension schemes, please contact our Indirect Tax team for an initial conversation. We'd be delighted to hear from you.