Pension scheme VAT recovery: Has your business claimed what it’s owed?
Jaspal Dhillon, 17 August 2026
Jaspal Dhillon, 17 August 2026
Most employers who sponsor a defined benefit pension scheme know they can recover some VAT on scheme running costs.
Fewer realise how much the rules have moved in their favour over the past year or that older HMRC guidance now sitting on file may be actively costing them money.
The starting point was a change HMRC made in June 2025, prompted by the long-running CJEU case of PPG Holdings.
Before that, investment management costs on a pension scheme were treated as having a dual use, split between the employer and the scheme trustees, which meant only a portion of the VAT was ever recoverable.
HMRC has now dropped that split entirely, and investment costs are treated as belonging to the employer in full and are recoverable under the normal input tax rules, with no apportionment exercise required.
On 4 June 2026, HMRC updated its Input Tax Manual and VAT Notice 700/17 to spell out how this works in practice.
The tax authority has confirmed that recovery now depends on the invoicing route used. To recover VAT on investment or administrative costs, the employer must be the one contracting for and paying for the service, with the invoice addressed to it.
Where the trustee holds the contract instead, which is very common in most pension schemes, the trustee needs to be VAT registered and either make a taxable onward supply to the employer or use a comparable structure that HMRC now recognises.
Older arrangements built around tripartite agreements, which used to be an accepted workaround that revolved around a specific relationship between the employer, the pension scheme trustees and a third-party service provider, no longer feature in the guidance at all.
This means that any schemes that have relied on an informal or historic arrangement, rather than one of the two structures HMRC now sets out, may find that VAT recovery on a pension scheme that was effective is no longer supported going forward.
Claims for VAT under this policy can be made retrospectively, but only within the normal four-year cap for recovery.
Businesses that have been under-claiming since the June 2025 change first took effect are approaching the point where the earliest periods start to fall out of scope following these changes.
If your business sponsors a scheme and hasn't reviewed its VAT position against the current guidance, then doing nothing has a real cost attached to it, and so they should look to act now to make sure the full amount of VAT is recoverable.
If you are unsure if this affects you, it is worth checking:
If there is any misalignment between your approach and HMRC's new preferred structure, it is worth resolving before the next scheme costs are invoiced.
Recent changes to HMRC's guidance have created opportunities for some businesses to increase VAT recovery on pension scheme costs, while also creating potential risks where historic arrangements no longer align with HMRC's preferred approach.
Reviewing pension scheme contracts, invoicing arrangements and VAT recovery methodologies now could help identify additional recoverable VAT and reduce the risk of future challenges.
If you would like to discuss how HMRC's updated guidance may affect your business or whether additional VAT can be reclaimed, please contact our specialist VAT team.
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