Exploring methods for claim recovery of Value-Added Tax on transaction costs
In a recent article published by *Tax Journal* on June 27, 2025, author Jonny Squires delves into the evolving landscape of Value Added Tax (VAT) recovery for employers and management services. The article offers valuable insights from HMRC and leading tax advisory firms, providing clear guidance on the changes that could significantly impact VAT recovery for many businesses.
According to the latest HMRC guidance, sponsoring employers of pension funds can now recover VAT on investment-related costs, such as investment management and advisory services, as input tax, effective from June 18, 2025. VAT on pension fund administration expenses remains recoverable, as before. VAT-registered trustees supplying management services to the employer can also recover input tax on costs incurred for these services, subject to normal deduction rules.
One of the key changes is that HMRC no longer considers investment costs as subject to dual use; all relevant VAT is seen as the employer’s and recoverable by the employer. Employers are encouraged to group arrangements to optimize VAT recovery, especially where services are shared between employer and trustees. Reviews and updates of partial exemption methods are necessary to reflect these changes, ensuring VAT recovery is not unintentionally restricted.
To maximize VAT recovery, employers must ensure clear contracting, with the employer (not the pension scheme or trustee) clearly identified as the recipient and payer for any deal fees, investment management, or advisory services. Robust documentation that evidences the service, the recipient, and the payment is essential, with invoices clearly naming the employer as the customer.
The article also emphasizes the importance of separating administration (always recoverable) from investment management (now recoverable from June 2025) in service agreements. If trustees supply management services and charge the employer, they must be VAT-registered and issue proper VAT invoices, allowing trustees to recover their input tax on costs incurred in providing those services.
For management services within groups, fees should be charged on an arm’s length basis and not contingent on profitability to maintain the link between supply and consideration, thereby safeguarding VAT recovery. Regular reviews of management and service agreements are recommended to ensure they remain aligned with the latest VAT policy and that invoicing and payment processes comply with HMRC requirements.
To prevent errors, employers should implement regular compliance checks, update partial exemption special methods, consider submitting protective claims for historic periods (subject to the four-year cap), ensure relevant staff are trained on the new rules, and engage VAT specialists to review existing arrangements and identify opportunities for enhanced recovery or correction of past errors.
The relaxation of HMRC’s policy on VAT recovery for employer pension fund investment costs presents a significant opportunity for employers to increase VAT recovery on deal fees and related management services. Maximizing recovery requires careful structuring of service agreements, clear documentation, and ongoing monitoring to prevent errors. Employers and trustees should review their current arrangements, update partial exemption methods, and consider professional advice to ensure full compliance and optimal VAT recovery.
The article concludes by emphasizing that all such arrangements need ongoing monitoring to prevent costly errors. The process of recovering VAT on deal fees is a common practice for many clients, and advisers must emphasize the importance of practical actions clients should take during the deal process to maximize successful VAT recovery. The article was published on July 15, 2025.
The significant change in HMRC's policy on VAT recovery for employer pension fund investment costs could lead to increased VAT recovery on finance-related costs, such as investment management and advisory services, within the business sector. For VAT-registered trustees supplying these services, it's essential to issue proper VAT invoices, adhere to regular reviews of management and service agreements, and maintain clear documentation to ensure VAT recovery is optimized.
