Previous policy
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 day-to-day administration of the scheme and the payment for the (sub-contracted) management of the investment activities of the fund.
HMRC accepted that administration costs amounted to deductible overheads of the employer’s business whereas HMRC 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.
Following CJEU case law2, HMRC updated their policy accepting that where an employer pays for and receives a supply in relation to an occupational pension, then the employer may be able to recover such input tax. This was so provided that a method of apportionment on a fair and reasonable basis was made between the use of these costs by the employer on the one hand and the fund on the other hand (known as "dual use").
"Normal deduction rules" apply
HMRC will no longer view asset management costs as being subject to "dual use", apportioned between the employer and the fund. Instead, all the associated input tax incurred will be seen as the employer’s and deductible by the employer, subject to normal deduction rules.
This clearly suggests that any employer will still need to ensure that it can demonstrate that it is the recipient of the relevant supplies for input tax deduction purposes. This is likely to create practical challenges as to the circumstances in which HMRC will accept that supplies of administration and investment management are actually received by the employer rather than the fund itself.
In addition, although HMRC accepts that trustees can deduct input tax if they supply management services to the employer, it is not necessarily the case that trustees should be registered for VAT, or that management services can be provided to the employer.
Even though questions remain, in our view, the policy is a positive step in the right direction. Businesses should be able to recover input tax on investment management costs provided that, in substance, they can evidence that those costs are consumed by the employer in the context of its economic activity.
If such right to deduct can be substantiated for the past, HMRC seem to accept that taxpayers can make claims for the past, subject to the normal four-year cap. We recommend businesses examine their position in detail if material amounts of input tax have not been recovered in the previous four years and assess the merits of making claims for under-recovered input tax.
1 The Revenue and Customs Brief 4 (2025).
2 Fiscale Eenheid PPG Holdings (Case C-26/12).
