An employer may incur costs relating to: 

• the administration of an occupational pension fund (administration costs); and
• the management of assets held by the fund (investment costs). 

HMRC’s historic position was that employers could recover input tax they incurred on administration costs, but not on investment costs.  

In 2014, HMRC changed its policy and allowed the employer to recover input tax incurred on investment costs if it could show that it contracted and paid for the investment services. This followed the decision of the Court of Justice of the European Union in the case of Fiscale Eenheid PPG Holdings BV cs te Hoogezand.  

In some circumstances, HMRC considered that there was “dual use” of the investment costs by the employer and the trustees of the fund. This meant that the employer and the trustees could each recover part of the input VAT, apportioned on a fair and reasonable basis. 

HMRC has now announced a further policy change. From 18 June 2025: 

• HMRC will no longer view investment costs as being subject to dual use. All of the input tax incurred can now be recovered by the employer; and
• where the trustees supply, and charge for pension fund management services, they can recover any input tax incurred in providing those services, provided they are VAT-registered.  

HMRC says that this is subject to normal input tax rules and the four-year cap.  

HMRC notes that businesses may need to propose new partial exemption special methods (PESMs). Any new PESMs approved by HMRC will take effect from the start of the tax year in which the PESM was submitted. 

HMRC says that it will publish guidance to explain the policy change by autumn 2025.