HMRC has recently announced a policy change to the deduction of VAT on pension fund management which opens the door to VAT savings for businesses.
HMRC has updated its position following a European case which related to an employer’s entitlement to deduct VAT that it paid on services relating to the administration of defined benefit pension funds and the management of the assets of the fund.
Employers can now recover input VAT in full on pension fund asset management services without any apportionment between employer and trustee.
Historic policy
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. There was therefore a restriction on the VAT recovery for costs incurred on the investment activities of a pension scheme.
The previous policy was that where there was dual use of investment costs by an employer and the trustees, a method of apportionment on a fair and reasonable basis was required to determine how much input tax could be deducted by each party.
New policy
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.
The new policy applies from 18 June 2025.
Opportunity
Any business that has been required to restrict VAT recovery on asset management of investments made by a pension fund may now have the opportunity to claim additional VAT. HMRC is authorising claims for additional input tax which will be subject to the normal 4-year cap.
Businesses who currently operate a partial exemption special method (PESM) may need to propose new PESMs to align VAT recovery with the new policy so a review of this will be vital.
Contact our VAT team via vat@ct.me for more help or information.
