Pinsent Masons tax partner Bryn Reynolds and pensions partner Susie Daykin
Changes to how VAT is recovered on funded pension scheme costs could have a major impact on both investment and administration costs, Pinsent Masons says.
The law firm said HM Revenue & Customs (HMRC) has updated its internal guidance on VAT recovery, following its briefing last year on proposed changes to deductions for pension fund management.
HMRC's previous guidance was clear that a VAT registered employer could recover the input tax on the administration of the scheme, even where "the trustee contracts and pays for the services supplied" provided that the employer holds an invoice in its own name.
This guidance appears to have been archived and the new guidance states that "if the contract for management services is between the fund manager and the trustees, then for the employer to deduct, the trustees should make a taxable charge to the employer".
Pinsent Masons tax partner Bryn Reynolds said this would likely reduce tax recovery options for employers.
He said: "Our reading of this guidance is that HMRC will no longer allow employers to recover VAT on administration and investment costs where the contract sits with the trustee – unless one of the two specific methods HMRC proposes are utilised.
"In practice this is likely to mean that VAT recovery will decrease, at least in the short term, given that many are utilising this contracting route. It also raises the prospect HMRC could assess retrospectively - although we think this would be very aggressive on their part.
"On the positive side however, the changes could ultimately improve the VAT recovery position for schemes which can adopt one of the alternative routes."
The internal guidance, issued on 4 June 2026, highlights a positional shift for trustees and employers to operate one of two structures only in order to enable input tax deduction for employers – with either the trustee joining the VAT group of the employer, or being required to register for VAT separately in order to make a taxable on-supply to the employer.
Pinsent Masons pensions partner Susie Daykin said that in light of the new guidance, pension funds should take a close look at how the changes would impact them going forward.
She said: "Employers and trustees will need to look carefully at the current arrangements for the supply of services to the pension scheme; changes may well be needed to facilitate ongoing VAT recovery."
Importantly, she said the two options that appear to remain available for VAT recovery will require the trustee to become VAT registered – a move that would mean yet more additional process and compliance requirements for trustees to navigate.
Daykin added that, to add to the confusion, HMRC had not yet updated or withdrawn VAT notice 700/17, which sets out the previous concessionary practice for recovery of VAT on administration costs, which would no longer seem to be in line with the revised HMRC guidance.
She said: "We hope HMRC will provide further clarity to the industry as soon as possible about the status of this concession, in particular whether and for what period it can still be relied on."
