HMRC has announced a new policy on the recovery by employers of VAT charged on investment services provided to their DB pension schemes.
Until 18 June 2025, the extent to which an employer could recover any VAT paid on services provided to its DB pension scheme depended on whether the services were administration services or investment services. Administration services are services relating to the day-to-day management of the scheme and include services such as actuarial advice, audit services and legal advice, as well as general scheme administration services. Investment services are services relating to the management of the scheme's assets and include services such as investment advice, brokerage and custodian charges and professional trustee services.
An employer could recover the VAT paid on administration services, including where the scheme trustees contracted and paid for the services supplied, provided the invoices for the services were made out in the name of the employer by the supplier. However, an employer could also recover VAT on investment services where:
- The employer contracted with the supplier directly for the services and paid for them itself (including as part of a tripartite contract with the trustees).
- The trustees contracted with the employer to provide a service to the employer of running the pension scheme (including both the administration services and the investment services).
- The scheme had a corporate trustee which entered into a VAT group with the employer.
In scenarios 2 and 3, HMRC considered that the services were used by both the employer and trustees and therefore required the employer and the trustees to apportion the investment services costs between themselves on "a fair and reasonable basis" (with that element apportioned to the trustees being disallowed). The employer could not therefore recover the VAT in full using these methods.
HMRC has now announced that, from 18 June 2025, it will no longer require investment costs to be apportioned between the employer and the trustees in scenarios 2 and 3. Instead, the entirety of the investment costs will be treated as the employer's, meaning that the employer will be able to recover the associated VAT in full (subject to normal VAT recovery rules). HMRC will publish further guidance explaining the policy change in autumn 2025.
The recovery of VAT on administration services and where the employer contracts directly with a supplier of investment services will remain unaffected.
What does this mean for employers and trustees of DB schemes?
Employers and trustees of DB schemes may wish to revisit their contractual and invoicing arrangements for their scheme's investment services in light of the policy change. However, they should ensure that they take tax and legal advice before making any changes as there may be regulatory and corporation tax implications. In addition, in some circumstances, the trustees may have a better VAT recovery rate than the employer. The most appropriate arrangement will therefore depend on the specific circumstances of the employer and the scheme.
What does this mean for employers and trustees of DC schemes?
The policy change only affects investment costs relating to DB pension schemes. Investment costs relating to DC pension schemes are generally exempt from VAT.
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