HMRC has updated its VAT Input Tax Manual sections VIT44600 to VIT44750 addressing input tax recovery on funded occupational pension schemes. The revised guidance sets out HMRC’s treatment of employer and trustee input tax, evidential requirements and the position where VAT grouping applies.

HMRC has updated the VAT Input Tax Manual sections dealing with funded occupational pension schemes, including VIT44600, VIT44650, VIT44700 and VIT44750.

The guidance expands on HMRC’s policy changes implemented from 18 June 2025 allowing employers to deduct input tax in full on costs incurred in relation to funded occupational pension schemes, subject to any applicable partial exemption restrictions.

Trustees may also deduct input tax to the extent that they are VAT-registered and make onward supplies to their sponsoring employer.

VIT44650 addresses the treatment of input tax from the perspective of the employer. Input tax incurred on services relating to administration and investment management costs is treated as the employer’s input tax and as an overhead of the business.

Where the employer contracts directly with a supplier, it may deduct input tax subject to holding a valid invoice and evidence of payment. An agreement to make pension contributions does not, of itself, evidence payment of VAT.

Two routes are described for evidencing that the employer has paid scheme costs:
• the employer is invoiced directly and pays the costs, or the costs are deducted from the pension scheme assets; or
• the trustees incur the costs and make a taxable supply of scheme management services to the employer, supported by an invoice.

Where invoices are properly issued to trustees, the input tax is treated as that of the trustees and cannot be reissued to the employer. In those circumstances, where the contract is between trustees and service providers, HMRC expects the trustees to make a taxable charge to the employer for running the scheme. The employer may then recover input tax on that charge and the trustees may deduct VAT incurred on services connected with making that charge.

VIT44750 addresses the position where VAT grouping applies. A corporate trustee may join a VAT group with the employer where the statutory conditions are met. In that case, supplies made by the trustee are treated as supplies of the VAT group’s representative member.

Costs incurred in relation to the administration and investment activities of the scheme are treated as overheads of the VAT group and are deductible according to the activities of the group as a whole, subject to the group’s partial exemption method.

The manual states that input tax may be deducted by the representative member only to the extent that it relates to taxable supplies made outside the VAT group. Any non-business or exempt activities of the employer or trustee must be taken into account.

Where a scheme provides services to employers outside the VAT group without consideration, the related costs are not incurred for the purposes of the VAT group’s business and are not treated as input tax. In such cases, costs should be apportioned so that only costs relating to group members are treated as input tax.

The guidance also confirms that, although members of a VAT group are jointly and severally liable for VAT debts, HMRC’s position is that pension scheme assets cannot be used to settle VAT liabilities except to the extent that the liability arises from the administration and operation of the scheme itself.

Comment

Whilst it is understandable that HMRC should seek to provide guidance on the evidence required to support an entitlement to deduct, the drafting is problematic and cuts against established VAT principles.

References to costs being “deducted from the pension pot” are difficult to reconcile with how funded schemes operate, where only trustees have the power to apply scheme assets. That may reflect imprecise drafting or a point HMRC may consider further.

It should be borne in mind that the VAT Input Tax Manual is internal guidance and should be viewed in that context. Re-evaluating VAT grouping structures or adopting complex invoicing arrangements appears premature at this stage. Care should also be taken when considering the position for retrospective claims.

It may be sensible to allow HMRC time to reflect on the draft before forming firm conclusions on its expectations in practice. The guidance is new and there may be scope for clarification as to how these statements are intended to operate.

In the meantime, businesses that have not taken steps to reclaim VAT incurred over the last four years should consider doing so.

If you wish to discuss how this affects your business, please contact us.