HMRC has released updated guidance affecting how VAT is treated on investment-related expenses for occupational pension schemes. The policy, which took effect on 18 June 2025, allows employers sponsoring defined benefit schemes to fully reclaim input VAT on investment and administrative costs, without needing to apportion costs between the business and the pension scheme.
This marks a practical change that aims to remove complexity for employers and tax professionals managing pension-related VAT issues. While the policy does not introduce new entitlements, it clarifies the approach HMRC will accept going forward.
What’s Actually Changed in the Policy?
Before this update, employers could only recover VAT on pension scheme expenses if they apportioned costs between their own activities and those of the pension scheme trustees. The process was often administratively complex, requiring detailed tracking and sometimes limiting VAT recovery.
From 18 June 2025, this requirement is relaxed. Employers can now reclaim 100% of VAT on investment management and administration costs for defined benefit pension schemes, as long as they hold the contract and pay for the service.
Who Benefits From This Change?
The update is highly relevant to:
- Employers sponsoring defined benefit occupational pension schemes
- Tax agents managing employer VAT positions
- Pension fund managers seeking VAT clarity
It does not apply to defined contribution schemes or standalone trust structures where the employer is not the contracting party. Only businesses that directly contract for and pay pension-related services can benefit from full VAT recovery.
Clarifying a Common Misconception
There has been confusion online suggesting that HMRC is now allowing VAT recovery on broader investment or fundraising costs, such as share issuance or capital raising. This is not true.
The 2025 update applies solely to pension schemes. HMRC continues to restrict VAT recovery on costs relating to issuing shares or general fundraising, as confirmed by their successful appeal in 2024, which denied VAT claims on share issue expenses.
Conditions and Requirements for Recovery
For employers to reclaim VAT under the new guidance, they must:
- Hold the invoice in the business’s name (not the trustees)
- Be the contracting party with the service provider
- Use the service to support taxable business activities
Employers should review existing contracts with advisers and administrators to ensure they meet these criteria and consider updating agreements if necessary.
What Does This Mean for VAT Compliance?
This guidance provides a clearer pathway for employers to recover VAT and reduces the compliance burden. However, businesses should maintain robust evidence of:
- The purpose of the services
- Their role as contracting party
- The use of funds for taxable purposes
HMRC has stated it will monitor how the new policy is applied and may revisit its guidance depending on how businesses implement the change.
Industry Reaction and Practical Steps
Tax professionals have welcomed the clarity, noting that it aligns HMRC’s policy more closely with practical business processes. By eliminating the need for apportionment, employers save both time and money, though accuracy in documentation remains critical.
Experts recommend reviewing:
- Contracts with pension scheme advisers
- VAT return treatment for past and future claims
- Whether defined benefit schemes fall under this update
Conclusion
HMRC’s June 2025 VAT policy update is a welcome clarification for employers with defined benefit pension schemes. While it doesn’t expand the types of recoverable costs, it removes administrative hurdles and simplifies compliance. The key takeaway is that VAT can now be fully recovered on investment-related pension costs, as long as the employer contracts and pays for the service.
However, this change does not affect VAT treatment on share issues or capital raising; those remain non-recoverable. Businesses should carefully assess their current arrangements and speak to their tax adviser to ensure alignment with the new rules.
Frequently Asked Questions
What does the June 2025 VAT update cover?
It allows full VAT recovery on investment and admin costs for defined benefit pension schemes, only where the employer contracts and pays.
Does this mean VAT can now be reclaimed on share issue costs?
No. The policy change is strictly limited to pension scheme investment costs. VAT on share issues is still non-recoverable.
Who qualifies for this VAT recovery?
Employers sponsoring defined benefit occupational schemes that directly engage and pay service providers.
Is partial exemption still a concern?
Less so for qualifying pension costs, as full recovery is now allowed if conditions are met. But other VAT rules still apply.
What should businesses do next?
Review contracts and VAT processes, ensure invoices are in the employer’s name, and consult a tax adviser to maximise compliance.
