UK and International Tax news

HMRC To Allow Input VAT Deduction On Pension Fund Management Costs

Wednesday 25th June 2025

HMRC have recently issued Revenue and Customs Brief 4 (2025) on a further policy change to the deductibility of input VAT on the costs of management of pension funds.

HMRC advise that employers can now claim back all of 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 are VAT registered.

Revenue and Customs Brief 43 (2014) outlined the VAT treatment that applied prior to the recent judgment of the CJEU in the PPG case, which considered 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.

HMRC’s historic policy was that employers could recover input tax they incurred on costs relating to the administration of their occupational pension funds, but not those in relation to the asset management of investments made by the fund. Where there was dual use of investment costs by an employer and the trustees, a method of apportionment on a fair and reasonable basis to determine how much input tax could be deducted by each party was required.

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.

As a result of the CJEU decision in PPG, HMRC has changed its policy to allow employers to recover input tax incurred on investment costs, provided that the employer can show evidence that they contracted and paid for the investment services.

With effect from 18 June 2025, HMRC will no longer view investment costs as being subject to dual use. Instead, all the associated input tax incurred will be seen as the employer’s and deductible by the employer, subject to normal deduction rules.

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. Any deductions by the trustees will be subject to normal deduction rules.

Any claims for additional input tax will be subject to the normal four year cap.

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.

If you would like more detail on the above, please contact Keith Rushen on 0207 486 2378.

 

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