HMRC announces favourable VAT policy change for employers with defined benefit pension schemes

HMRC has announced that it will now treat all VAT incurred in respect of the investment management costs of an employer’s pension fund as recoverable by the employer, subject to normal VAT deduction rules. This policy applies from 18 June 2025.

This is a significant development for those employers with a defined benefit scheme and replaces HMRC’s previous policy of treating such costs as requiring apportionment between the employer and the trustees of the pension fund for VAT purposes.

The opportunity for employers with defined benefit pensions

HMRC will no longer view investment management costs as being subject to dual use, and will allow the full amount of input tax incurred on those costs to be recoverable by the employer. HMRC also says that VAT-registered trustees which supply pension fund management services to the employer, will be able to deduct their own input tax incurred for the purpose of providing those services, again subject to normal VAT deduction rules.

HMRC’s policy change gives employers the opportunity to review and potentially increase their input tax recovery. They may also be able to submit repayment claims for any additional, unclaimed, input tax incurred on investment management costs from the past four years.

Businesses should also review their partial exemption special methods to ensure their VAT recovery is in keeping with the new policy. Any new partial exemption special methods approved by HMRC will have effect from the start of the tax year in which they were submitted.

VAT recovery for employers with defined contribution schemes

The position for defined contribution schemes is different: supplies of investment management services to a pension fund are exempt supplies if the pension fund meets the requirements of a ‘special investment fund’. HMRC’s guidance sets out four criteria and notes that most direct contribution schemes will satisfy them:

1. 1     They are solely funded (directly or indirectly) by persons to whom the retirement benefit is to be paid (ie the pension customers)
2. 2.    The pension customers bear the investment risk
3. 3.    The fund contains the pooled contributions of several pension customers
4. 4.    The risk borne by the pension customers is spread over a range of securities.

HMRC also accepts that funds that contain the pooled assets of personal pension schemes and that have all of the above characteristics will also fall within the VAT exemption for fund management services.

Comment

HMRC says that it will publish guidance by autumn 2025 that will explain the policy change. However, employers should start considering their VAT position now. It will also be important for employers to review their existing contractual and invoicing arrangements to ensure that they are able to take advantage of this opportunity.

Kennedys has a full service Tax Disputes and Investigations team which can provide advice and assistance in reviewing the VAT positions of employers, trustees and the providers of investment management services in light of HMRC’s policy change.

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