HMRC – VAT on Defined Benefit Scheme (DB) Investment Management Costs

Overview

HMRC has announced a policy change in relation to input VAT deduction on investment management costs incurred in relation to DB schemes. This change took effect from 18 June 2025.

In short, employers can now potentially claim back all the VAT on asset management costs linked to pension funds, subject to general rules and to the extent they operate taxable businesses. They no longer need to lose input tax on the basis that asset management costs are not proper inputs of the business.

If trustees are providing asset management services and charging the employer, together with VAT, they can also now claim back all the VAT on their costs, if they are VAT-registered, as the principle of dual use of those costs no longer applies .

Both employers and trustees must still follow the usual VAT rules. Subject to further detailed guidance, it would be prudent to assume that in line with general principles, the employer should still receive the services and hold a valid VAT invoice to recover the VAT.

 

Background

Prior to the landmark case of PPG Holdings, HMRC's policy was that employers could recover input tax they incurred on costs relating to the administration of their defined benefit occupational pension funds, but not those in relation to the asset management of investments, which was a proper cost of the trustees. However, following the PPG Holdings case, HMRC changed its policy from 2014 to allow employers to recover input tax incurred on investment management costs, provided that the employer could show evidence that they contracted and paid for the investment management services. HMRC took the view that VAT on asset management services may have a direct and immediate link both to the trustee's investment activity and supplies made by the employer.

Different arrangements were put in place for employers to be treated as receiving the investment management services to achieve VAT deduction, some rather convoluted, for example, tripartite arrangements, and VAT grouping. Where there was dual use of investment costs by both the employer and the trustees, HMRC required a method of apportionment on a fair and reasonable basis to determine how much input tax could be deducted by each party. Furthermore, even though the employer could make arrangements to pay the costs, HMRC guidance made it clear that a corporation tax deduction could not always be obtained under accounting standards.

 

New policy for input VAT on DB scheme investment management costs

HMRC will no longer view investment management costs as being subject to dual use by the pension fund trustees and the employer, but instead, just as administration costs, they will be treated as proper expenses of the employer's business. Accordingly, all the associated input tax is capable of being proper input VAT of the employer and deductible by it, subject to normal deduction rules.

In addition, where trustees are supplying pension fund management services to the employer and charging for them, together with VAT, they will also be able to deduct input tax incurred for the purpose of providing those services, provided that they are VAT-registered.

 

What does this mean for you?

1. In appropriate cases, claims for underclaimed input tax should be submitted now, to protect against the four year time limit.

2. Businesses may need to propose new partial exemption special methods to align their VAT recovery with the new policy, to reflect the increased input tax recovery.

3. Contractual arrangements with investment management service providers should be revisited, as it should be possible to simplify certain arrangements effectively.

4. Care will still need to be taken to conform with regulatory requirements, and avoid conflicts of interest.

5. Employers should ensure that they do not reclaim input tax without a VAT invoice addressed to them. It is not yet clear what contractual evidence HMRC will insist on to show the employer has received the asset management supplies.

HMRC states that it will publish further guidance this autumn.

Please contact your usual adviser for further assistance.