HMRC revises policy on VAT on DB investment management costs

On June 18, 2025, HMRC published a brief confirming that employers can claim all the input VAT incurred on costs relating to the management of assets held in occupational pension funds (investment costs).

Since the 2014 decision of the CJEU in PPG Holdings, employers have been able to recover input VAT incurred on investment costs provided they could show they had contracted and paid for those services.

However, where there was dual use of investment costs by an employer and the pension fund trustees, a "fair and reasonable" basis apportionment was required to determine how much input tax each party could deduct.

The recent publication from HMRC confirms that, from June 18, 2025, HMRC no longer views investment costs as being subject to dual use. Instead, all input VAT incurred on investment costs is seen as the employer's input VAT and subject to deduction according to normal rules.

Additionally, the brief confirms that VAT-registered pension fund trustees supplying pension fund management services to the employer and charging for them can also deduct input VAT incurred for the purposes of providing those services, subject to the normal deduction rules.

This change of policy may impact existing approved partial exemption special methods (PESM) and new PESMs aligning VAT recovery with the new policy approved by HMRC will take effect from the start of the tax year in which the PESM was submitted.

HMRC confirms that it will publish guidance by autumn 2025.