Employer Recovery of VAT on Pension Scheme Costs: Updated HMRC Policy
HM Revenue & Customs (HMRC) has updated its VAT Input Tax Manual (the Manual) in relation to the recoverability of input tax incurred by employers and trustees in relation to both administration services and investment management (IM) services supplied to funded occupation pensions schemes (and, in particular, in relation to DB schemes). HMRC has also updated VAT Notice 700/17 (the Notice) which provides guidance for employers and trustees on the recoverability of input tax.
While some of the changes are welcome and reflect policies HMRC announced in June 2025, the updates appear to go further than contemplated in these announcements. In particular, the amendments appear to narrow the circumstances in which employers can recover VAT charged on administration services where such services are supplied to and paid for by the trustee of the pension scheme and entirely remove previous guidance on the use of tripartite agreements for recovering VAT.
Background
The Position Before June 2025
Before June 2025, whether an employer could recover VAT on services provided to its pension scheme depended on two factors: the type of service provided (whether IM or administration services) and the contractual structure.
For IM services, an employer could recover VAT where:
- The employer contracted directly with the supplier for the services and paid for them itself (including as part of a tripartite contract with the scheme trustees) (Scenario 1);
- The trustees contracted with the employer to provide a service to the employer of running the pension scheme (covering both administration and IM services) (Scenario 2); or
- The scheme had a corporate trustee which entered into a VAT group with the employer (Scenario 3).
Under Scenarios 2 and 3, HMRC took the view that both the employer and the trustees used the IM services. It therefore required the employer and the trustees to apportion the costs between them on "a fair and reasonable basis", with the VAT apportioned to the trustees generally not being recoverable in full as input tax. In practice therefore, employers could not recover VAT on IM services in full under these arrangements.
The position for administration services was more generous. An employer could recover VAT on administration services in all three scenarios set out above without any apportionment requirement in Scenarios 2 and 3. In addition, an employer could recover VAT on administration services even where the trustees contracted and paid for the services, provided the supplier addressed its invoices to the employer.
Where an invoice related to both administration and IM services, employers could treat 30% of the costs as relating to administration services and the remaining 70% as relating to IM services, unless it could evidence that an alternative split was more appropriate.
The Position from June 2025 to Now
In June 2025, HMRC announced a welcome change: the apportionment requirement for costs related to IM services in Scenarios 2 and 3 would be removed. Accordingly, from 18 June 2025, the entirety of such costs would be treated as the employer's, meaning the employer could recover the associated VAT in full (subject to normal VAT recovery rules). HMRC indicated it would publish further guidance in autumn 2025 but this never materialised.
The 2025 announcement did not affect the recovery of VAT on administration services, the position where the employer contracted directly with a supplier of IM services (Scenario 1) or the 30/70 split of invoices covering administration and IM services.
The Latest Development: Updates to the Manual and the Notice
HMRC has now updated the Manual and the Notice. As expected, the requirement to apportion in Scenarios 2 and 3 has been dropped such that there is no longer a distinction between the VAT treatment of administration and IM services in Scenarios 2 and 3. The 30/70 split of invoices covering administration and IM services has also been dropped—a logical step given there is now no difference in the recoverability of VAT charged on administration and IM services.
However, HMRC made additional changes to the Manual which were not anticipated, and there appears to be a disconnect between the position set out in the Manual and that set out in the Notice.
The Manual is clear that the employer of a DB scheme can reclaim all VAT incurred in relation to services provided to its pension scheme (irrespective of whether they relate to administration or IM), provided the employer contracts for the services. But it is unclear whether the requirement for the employer to contract for the services amounts to a change in HMRC's position. Previously, employers could recover VAT on administration costs if the invoice was addressed to the employer, even if the contract for the services was between the trustees and the provider. The Manual no longer says this. This suggests that this route is no longer available and that HMRC's approach going forward will be to treat an employer as only able to recover VAT on administration services in Scenarios 1 to 3. However, the Notice says nothing about the employer contracting for the services (whether administration or IM) —only saying that employers should hold tax invoices made out in their name—suggesting that the position has not changed.
In addition, references in the Manual to employers contracting directly with suppliers via a tripartite contract with the trustees (as contemplated in Scenario 1), and the accompanying guidance on tripartite contracts, have been removed. This suggests that HMRC's approach moving forward may be to no longer accept that a tripartite contract (and invoicing of employers pursuant to a tripartite contract) enables employer VAT recovery.
Implications: What Should Employers and Trustees Do?
Given the lack of clarity following the updates to the Manual and the Notice, the industry has requested further clarity/guidance from HMRC. We would advise employers and trustees to hold off on doing anything pending HMRC's response.
Once the position is clear, employers and trustees of DB schemes may wish to revisit their contractual and invoicing arrangements for the services provided to their schemes. The 2025 policy changes only affected IM costs relating to DB pension schemes as IM costs relating to DC pension schemes are generally exempt from VAT. However, the potential narrowing of the administration services position could affect DC schemes. Employers and trustees of DC schemes may also therefore wish to revisit their contractual and invoicing arrangements.
Before making any changes to their arrangements, employers and trustees (whether of a DB or DC schemes) should take tax and legal advice. There may be regulatory and corporation tax implications associated with the different recovery options, and in some circumstances the trustees may have a better VAT recovery rate than the employer. The most appropriate arrangement will depend on the specific circumstances of the employer and the scheme.
How Can We Help?
Mayer Brown regularly advises employers and trustees on these issues. We can help you by:
- Reviewing your existing contractual and invoicing arrangements and advising on the VAT recovery position under current law and HMRC guidance.
- Advising on the legal, regulatory and tax implications of any proposed changes.
- Drafting and negotiating any necessary amendments to your existing contracts.
