VAT recovery on pension investment costs: What’s changed?

Yesterday, HMRC issued Revenue and Customs Brief 4 (2025), marking a major shift in the long-running saga of VAT recovery on pension investment costs. For businesses and trustees alike, this is more than a technical tweak—it’s a chance to simplify compliance and potentially access significant retrospective VAT recovery.

A Quick Recap: The PPG case & VAT recovery on Pension Investment costs

It all begins with the 2013 PPG Holdings case (C-26/12), where the Court of Justice of the European Union ruled that employers could, under certain conditions, recover VAT on both the administration and investment management of defined benefit pension schemes. This challenged HMRC’s long-standing position that only administration costs were recoverable by employers.

In response, HMRC introduced a patchwork of options to facilitate recovery, including:

• Tripartite contracts between employers, trustees, and service providers
• VAT grouping to bring trustees and employers under one VAT registration
• Management services agreements where trustees recharged services to employers

While these models offered a route to recovery, they were often administratively burdensome and legally complex. Many businesses struggled to implement them effectively, and HMRC’s guidance evolved slowly and cautiously.

HMRC’s New Policy: VAT deduction on the management of pension funds

As of 18 June 2025, HMRC has confirmed a new, simplified policy:

• Employers can now treat all VAT on investment management services related to occupational pension schemes as their input tax and recover VAT, subject to the usual input tax rules (i.e. depending on whether the cost is incurred for exempt or taxable activities)
• The concept of dual-use between employers and trustees has been dropped
• VAT-registered trustees may also recover VAT on their costs, where they make taxable supplies (e.g. charging the employer for scheme management)
• A four-year retrospective window is available for eligible claims
• Businesses may need to update their partial exemption methods to reflect the new treatment

This is a significant departure from the previous regime and removes the need for many of the contractual workarounds that had become standard practice.

How will the new VAT recovery on pension investment costs impact you?

If you are an employer funding a defined benefit pension scheme or a VAT-registered trustee, this change could materially affect your VAT position.

Key implications include:

• Simplified recovery: No more need for tripartite contracts or VAT grouping just to access input tax
• Cashflow opportunity: Potential to reclaim VAT on historic costs going back four years
• Compliance refresh: Existing partial exemption special methods (PESMs) may need to be reviewed and resubmitted to HMRC
• Contractual clarity: Businesses should revisit how pension-related services are contracted and invoiced

Now VAT recovery on pension investment costs has changed- What should you do next?

• Identify affected schemes: Focus on defined benefit arrangements and any schemes where investment management costs have been incurred
• Review historic VAT treatment: Assess whether there’s scope to submit retrospective claims
• Evaluate current PESMs: Ensure your partial exemption method reflects the new policy and doesn’t under-recover
• Engage stakeholders: Coordinate with finance, tax, legal, and pension teams to align on the next steps
• Speak to HMRC if needed: Where changes to PESMs are required, early engagement can smooth the process

How AAB Can Help

As VAT advisors, we are here to help you manage this transition and make the most of the opportunity. That includes:

• Reviewing historic costs and preparing retrospective claims
• Assessing and updating PESMs to reflect the new treatment
• Unwinding legacy arrangements like VAT grouping or management services agreements where they are no longer needed
• Supporting trustees in understanding their recovery rights and obligations
• Engaging with HMRC where method changes or clarifications are required

This is a rare moment where VAT policy has become less complicated. Businesses that act now can not only improve compliance but also recover real value. If you would like support on these changes, please get in touch. Let’s make the most of this shift.

At AAB, our VAT experts have years of experience helping businesses manage the complex VAT landscape and support with legislative and policy changes. If you have any questions, please don’t hesitate to get in contact with Gabrielle Bird or your usual AAB Contact.