Pension Schemes - VAT Update

Following a raft of litigation and ever-changing guidance throughout the 1990s, 2000s and 2010s in the area of VAT recovery and pension schemes, taxpayers have enjoyed a seemingly settled approach from HMRC for almost a decade. However, this period of dormancy has been ended with the release of Revenue & Customs Brief (4) 2025.

The background: following the ECJ decision in ‘Fiscale Eenheid PPG Holdings BV cs te Hoogezand’ (C-26/12) (“PPG”), HMRC allowed employers to deduct VATable costs relating to both the administration and management (including investment management) of associated pension schemes in certain circumstances, such as where a tri-partite arrangement was put in place between the employer, its pension scheme and, for example, the investment manager supplying investment management services, or where the pension scheme and the employer were in a VAT group.

Such arrangements were often tricky to put into effect, due to wider regulatory and tax reasons, but in principle, HMRC would accept that VAT on investment management costs could de facto be treated as being recoverable by both an employer and its pension scheme – i.e. it had dual use and must be apportioned in some way.

The new R&CB changes this policy, now stating that the employer may treat all of the input tax on investment management costs as its own and recover it (subject to its normal VAT recovery position). This will widely benefit sponsoring employers as their VAT recovery positions are generally better than those of their associated pension schemes.

However, there is a wrinkle: the wording in the R&CB is such that it is unclear whether this new policy applies solely to the previous ‘dual use’ scenario or whether it can be more widely applicable to all employers’ situations, whether or not they have made arrangements allowing some element of VAT recovery on investment management costs.

Moreover, there is further confusion, as the change in policy is stated as being from 18 June 2025 – but the R&CB then appears to invite retrospective 4-year claims for additional input tax. This implies that the underlying law in this area has not altered.

And finally, the R&CB ends by stating that it will publish guidance explaining the policy change in the autumn of 2025.

The key message: VAT and pension schemes remains a complex area and if you are impacted by this new policy or would like to about this or any wider VAT questions you may have, please get in touch and we can advise on the best practice in light of these changes.