Input VAT: new guidance on employer-funded pension costs

Following on from the announcement in 2025 of changes to HMRC’s policy on recovery of input VAT incurred on employer-funded pension costs, HMRC has now published updated guidance in its VAT Manuals on this topic. The guidance on this issue has changed significantly and it will be important for employers to consider the application of the new guidance to their specific circumstances and take any necessary action to ensure that they maximise their input VAT recovery.

In particular, the new guidance makes it clear that HMRC will expect the employer to be the direct contractual recipient of the supplies of administration or fund management services, with invoices issued to it in its name, in order to recover associated input VAT. If this is not the case, then HMRC will expect those costs to be incurred by the trustees of the scheme, with the trustees then making a taxable charge for managing the scheme to the employer, potentially requiring the trustee to register for VAT.

As a result of this change, it will be important for affected business to review their current arrangements for pension scheme funding to determine if they meet HMRC’s updated requirements and, if not, put in place measures to ensure continued input VAT recovery going forwards.

Background

In 2014, HMRC announced in Revenue & Customs Brief 43 (2014) that they would, in principle, allow input VAT recovery where an employer received a supply of pension fund administration or investment management. Historically, HMRC took the view that where an employer funds an occupational pension scheme, it was necessary to distinguish between the costs of setting up and the day to day administration of the scheme and the payment for the (usually sub-contracted) management of the investment activities of the fund. HMRC accepted that the former amounted to deductible overheads of the employer’s business for VAT purposes, but considered that any VAT on supplies of investment management services to the scheme related solely to the activities of the pension scheme and could not be deducted by the employer. Where a single invoice was received, covering both administration and investment management, HMRC would in general allow a 70:30 split (70 per cent investment management, 30 per cent administration).

In Fiscale Eenheid PPG Holdings, the ECJ held that, provided a direct and immediate link exists between the pension fund costs and the employer’s business, then input VAT incurred by the employer on both pension fund administration and fund management would be deductible. HMRC accepted that this decision required a change in policy, with the updated policy published in in Revenue and Customs Brief 43 (2014). HMRC accepted that where an employer pays for and receives a supply in relation to an occupational pension scheme, then the employer may be able to recover that input VAT and, in particular, in a significant change of policy, that “there are no grounds to differentiate between the administration of a pension scheme and the management of its assets”. Accordingly, provided that the employer can show that it is the recipient of the supply, it will be entitled to input VAT credit. In this context, the Brief indicated that it will be important for an employer to obtain “contemporaneous evidence that the services are provided to the employer”. At minimum, this required the employer to be a party to the contract for the relevant pension services and also to pay for the services.

While the change of policy allowed employers to deduct input tax on investment costs, which they could not do previously, HMRC still considered such input tax to have a dual use between the employer and the trustees and required an apportionment of input tax between the two parties. However, HMRC announced a further policy change in Revenue & Customs Brief 4 (2025), which stated that HMRC would no longer require an apportionment of VAT incurred on asset management costs seen as having a dual use between the employer and pension fund. Under the new policy, which applied from 18 June 2025, HMRC no longer views 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. For more details of Revenue & Customs Brief 4 (2025) see our earlier Insights article.

HMRC updated guidance

On 4 June 2026, HMRC published substantially updated guidance on recovery of input VAT by employers on occupational pension scheme costs in their Input VAT Manual, to take into account the changes announced in Revenue & Customs Brief 4 (2025).

The new guidance confirms (at VIT44600) that from 18 June 2025 employers were able to deduct input tax in full (subject to any partial exemption restrictions) on costs that they incur in relation to funded occupational pension schemes. Much of the earlier guidance on distinguishing between costs attributable to administration and costs attributable to investment has been removed as unnecessary.

However, it remains the case that input VAT is only deductible if it is the employer’s input VAT and not the pension scheme trustee’s input VAT. In this context, the new guidance (at VIT44650) makes it clear that for the employer to recover input VAT, the invoice for the relevant costs should normally be in the name of the employer (albeit that, where the employer contracts directly for the fund management services, an invoice “care of” will normally be acceptable). Invoices made out to the trustee and not the employer will not give rise to input VAT for the employer. The guidance also makes it clear that if the contract for management services is between the fund manager and the trustees, then for the employer to deduct, the trustees should make a taxable charge to the employer for their services of running the scheme on the employer’s behalf. The employer will then be able to deduct input tax on this charge.

Therefore, there are two routes for an employer to evidence that they paid the costs of running a scheme and which therefore amount to the employer’s input VAT:

• invoices from the fund managers issued to the employer directly which they paid or deducted from the pension pot; the guidance states that either is acceptable as long as the employer holds an invoice and can evidence the payment; or
• the trustees of the scheme incurred all of the costs and raise a taxable charge for managing the scheme to the employer, so that they hold a valid invoice.

The guidance also continues to confirm that in appropriate circumstances a corporate trustee of a pension scheme may VAT group with the employer, in which case pension scheme costs will be overhead costs for the VAT group and deductible in accordance with the group’s activities as a whole.

Where an employer recharges the costs of administration and/or investment services onto the pension scheme, then that recharge will be seen as consideration for an onward supply (VIT45410). However, where the cost is built into a regular review and adjustment of the employer’s contributions, rather than being a specific recharge of the costs, then HMRC will generally accept that this does not constitute consideration for a supply by the employer.

Comment

HMRC’s earlier guidance stated that an employer could recover the input tax on the administration of the scheme, “even where the trustee is responsible for the general management of the scheme under the trust deed and where the trustee contracts and pays for the services supplied. However, in such circumstances, trustees must arrange for invoices to be made out by the supplier in the name of the employer so that employers hold tax invoices made out in their own name in order for them to be able to deduct VAT.” This no longer appears to be the case.

The new guidance now makes it clear that either the employer must be the direct recipient of the supplies in receipt of the necessary invoices or must be invoiced by the trustee (who has incurred the costs) for a supply of management services in order to recover associated input VAT. This may require some businesses to adjust their current pension scheme funding arrangement to ensure that they can meet the updated requirements set out in HMRC’s manual.