HMRC has announced a further policy change to VAT deduction on the management of pension funds, confirming that it will no longer view investment costs as being subject to dual use.

In addition, where trustees are supplying pension fund management services to the employer and charging for them, they will also be able to deduct input tax incurred for the purpose of providing those services, provided they are VAT-registered.

Any deductions by the trustees will be subject to normal deduction rules, and any claims for additional input tax will be subject to the normal 4-year cap.

The new policy will apply from 18 June 2025, with HMRC set to publish guidance to explain the policy change by autumn 2025.

As a result of the Court of Justice of the European Union's decision in ‘Fiscale Eenheid PPG Holdings BV cs te Hoogezand (C-26/12) (PPG)’, HMRC changed its policy to allow employers recovery of input tax incurred on investment costs, provided that the employer could show evidence that they contracted and paid for the investment services.

Different arrangements were put in place for employers to achieve VAT deduction for the costs of administering occupational pension funds and managing their assets.

This included arrangements where the pension trustees supply administration services to an employer, and arrangements with VAT grouping.

In both arrangements, HMRC considered that the VAT incurred on asset management services may have a direct and immediate link to the trustee’s investment activity and the supplies made by the employer, provided it is used by the employer to make those supplies.

This resulted in dual use of investment costs by the employer and the trustees of the fund.

Previously, HMRC's policy was that where there was dual use of investment costs by an employer and the trustees, a method of apportionment on a fair and reasonable basis to determine how much input tax could be deducted by each party was required.

However, HMRC has confirmed that it will no longer view investment costs as being subject to dual use, as of 18 June 2025.

Instead, all the associated input tax incurred will be seen as the employer’s and deductible by the employer, subject to normal deduction rules.

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