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Purpose of this brief

This brief announces a further policy change to VAT deduction on the management of pension funds.

Revenue and Customs Brief 43 (2014) outlines the VAT treatment that applied prior to the judgment and the policy changes made as a result of the Court of Justice of the European Union (CJEU) decision, in: 鈥楩iscale Eenheid聽PPG聽Holdings BV cs te Hoogezand (C-26/12) (PPG)鈥�.聽

This case was about an employer鈥檚 entitlement to deduct VAT paid on services relating to the administration of defined benefit pension funds and the management of the assets of the fund.

Who should read this brief

This brief is relevant to:

• businesses and other taxable entities that provide pension funds for their employees
• pension administration and asset management service providers
• pension fund trustees and pension providers
• tax advisers

Background

HMRC鈥檚 historic policy was that employers could recover input tax they incurred on costs relating to the administration of their occupational pension funds, but not those in relation to the asset management of investments made by the fund.

As a result of the CJEU decision in 鈥楩iscale Eenheid聽PPG聽Holdings BV cs te Hoogezand (C-26/12) (PPG)鈥�, 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, those arrangements include:

• the pension trustees supply administration services to an employer
• VAT grouping

In both arrangements, HMRC considered the VAT incurred on asset management services may have a direct and immediate link to the trustee鈥檚 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.

HMRC previous policy

HMRC policy until now is 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.聽聽

New policy

HMRC will no longer view investment costs as being subject to dual use. Instead, all the associated input tax incurred will be seen as the employer鈥檚 and deductible by the employer, subject to normal deduction rules.

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聽 normal deduction rules.

Any claims for additional input tax will be subject to the normal 4-year cap.

Impact on partial exemption methods

Businesses may need to propose new partial exemption special methods (PESMs) to align their VAT recovery with the new policy. Any new PESMs approved by HMRC will take effect from the start of the tax year in which the PESM was submitted.

Guidance on how to seek approval for a PESM can be found at Appendix 2 of Partial exemption (VAT Notice 706).

Additional information

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