New UK policy for VAT recovery on pension fund investment services

Why should I read this?

On 18 June 2025 HMRC amended, with immediate effect, their policy regarding the deductibility of VAT on costs relating to the asset management of investments made by occupational pension funds (investment costs).

This significant change simplifies the input tax recovery process for occupational pension funds by treating all input tax incurred on investment costs as belonging to, and deductible by, the employer (subject to normal VAT deduction rules).

The change clarifies and broadens the basis on which input tax may be recovered by employers from HMRC, enabling improved input tax recovery in respect of future supplies and the potential for input tax claims in respect of historic supplies (subject to the normal four year restriction).

HMRC’s previous policy

HMRC’s previous policy was that employers could recover input tax they incurred on investment costs in relation to their occupational pension funds, provided the employer could show evidence that they contracted and paid for the investment services.

When there was dual use of investment costs by both an employer and the pension fund trustees, HMRC required a fair and reasonable apportionment method to be used to determine the amount of input tax recoverable by each party, resulting in administrative burdens and uncertain outcomes.

HMRC’s new policy

With effect from 18 June 2025, HMRC no longer view investment costs as being subject to dual use.

HMRC now consider that all the input tax associated with investment costs belongs to the employer and is deductible by the employer (subject to normal VAT deduction rules). This avoids the need for apportionment and represents a significant simplification of HMRC’s previous policy. The change will be helpful for pension funds which receive taxable (rather than exempt) supplies of asset management services (i.e. pension funds which do not meet the criteria to be special investment funds for the purposes of the fund management exemption).

Additionally, if pension fund trustees supply pension fund management services to the employer and charge for those supplies, they may recover the input tax incurred for the purpose of providing those services (subject to normal VAT deduction rules and the trustees being registered for VAT).

What should I do?

Employers and pension fund trustees should review HMRC’s new policy paper and consider its potential impact on their VAT recoverability position.

Employers and trustees may be able to make claims for additional input tax in respect of relevant historic supplies (subject to the usual four year time limit).

Businesses should also review their existing partial exemption special methods (PESMs) in light of the new policy and consider whether they need to propose new PESMs. HMRC have confirmed that any new PESMs which are approved by HMRC will take effect from the start of the tax year in which the PESM is submitted.

HMRC have indicated they will publish guidance to explain the policy change by autumn 2025. Affected businesses should ensure they carefully consider the implications of this guidance when it is published.

How Eversheds Sutherland can help

If you have any questions in relation to HMRC’s new policy and its potential impact on your business, please do not hesitate to get in touch with any of the Eversheds Sutherland contacts set out below.

We can advise you on:

• how the new policy may affect your VAT recoverability position;
• any adjustments which may be required to your existing PESMs; and
• whether you may be able to claim input tax from HMRC in respect of historic supplies, and the method for doing so.