On 18 June 2025, HM Revenue & Customs (HMRC) announced a significant policy change regarding the recovery of Value Added Tax (VAT) on investment costs associated with Defined Benefit (DB) pension schemes. This update simplifies the VAT recovery process for employers, allowing full recovery of VAT on investment management services without the need for complex arrangements previously required.Â
Background: Previous VAT Recovery Challenges
Historically, employers faced challenges in recovering VAT on investment services for DB pension schemes. The recovery was contingent upon specific contractual arrangements, such as:
- Tripartite agreements between employers, trustees, and service providers
- VAT grouping with pension scheme trustees
- Management service agreements where trustees recharged services to employers
These arrangements were often administratively burdensome and legally complex, leading to partial VAT recovery and increased compliance costs
The New HMRC Policy Explained
Effective from 18 June 2025, HMRC’s updated policy allows:
- Full VAT recovery: Employers can now fully recover VAT on investment management services related to DB pension schemes, provided they meet standard VAT recovery rules.
- Elimination of dual-use apportionment: The previous requirement to apportion VAT between employers and trustees based on dual-use has been removed.
- Trustee VAT recovery: VAT-registered trustees supplying pension fund management services to employers can also recover VAT on their costs, subject to normal rules.
Implications for Employers and Trustees
This policy change offers several benefits:
- Simplified compliance: Reduces the need for complex contractual arrangements.
- Potential cost savings: Enables full VAT recovery on investment services, improving cash flow.
- Retrospective claims: Employers may submit claims for VAT recovery on eligible costs incurred in the past four years, subject to the standard time limits.
Action Steps for Employers
To capitalize on this policy change, employers should:
- Review contracts: Ensure that contracts for investment services are between the employer and service providers.
- Assess invoicing: Verify that invoices for investment services are addressed to the employer.
- Evaluate VAT recovery methods: Consider updating Partial Exemption Special Methods (PESMs) to reflect the new policy.
- Submit retrospective claims: Identify and claim eligible VAT on past investment costs within the four-year time frame.
- Consult advisors: Seek professional advice to navigate the changes and optimize VAT recovery.
Conclusion
HMRC’s 2025 policy update marks a significant shift in VAT recovery for DB pension schemes, offering a more straightforward and beneficial approach for employers. By taking proactive steps to align with the new policy, businesses can enhance their VAT recovery and reduce administrative burdens.Â
