What has changed in HMRC’s VAT recovery policy?

In June 2025, HMRC updated its policy on VAT recovery for funded pension schemes (the main focus being on defined benefit (DB) schemes), significantly expanding the circumstances in which sponsoring employers can recover VAT on scheme-related costs.

Historically, employers were entitled to recover VAT on costs relating to pension scheme administration. However, VAT on costs linked to investment management was only recoverable in very limited circumstances, meaning that VAT recovery was often restricted and subject to complex recovery rules.

Under the revised approach, VAT on investment-related costs can qualify as part of an employer’s general business overheads, even where the contract for the supply of the services is between the adviser and trustees. This is a more pragmatic and commercially realistic interpretation of the rules and aligns more closely with how businesses operate in practice.

What HMRC’s new policy means for schemes and employers

The policy change has two key implications for the sector.

Firstly, a key feature of the policy change is HMRC’s invitation to businesses to submit claims for under-recovered VAT over the previous four years. This creates an immediate opportunity for pension schemes and employers to revisit past VAT treatment and identify amounts that may now be recoverable.

Secondly, it opens up the possibility of more efficient VAT recovery going forward, subject to arrangements being structured in line with the revised approach. Further published guidance is still expected.

VAT recovery is not automatic. Entitlement will depend on the specific facts of each arrangement, including the invoicing position between employers, trustees and service providers. This means a detailed and fact-specific review is essential before submitting any claim to HMRC.

Key next steps for schemes and employers

Given the four-year time limit on claims, there is a limited window for employers and trustees to act. Priority should be given to reviewing both historic VAT treatment and current arrangements to ensure that potential opportunities are not missed.

In practice, this involves revisiting past positions to identify any under recovery of VAT, alongside assessing whether existing contractual and invoicing arrangements align with HMRC’s revised approach. Where opportunities are identified, these should be quantified promptly to avoid amounts falling out of time under the four year cap.

Looking ahead, it is also important to consider whether current structures remain fit for purpose and capable of supporting more efficient VAT recovery in the future.

In the absence of formal guidance, understanding HMRC’s expectations in practice will be key to ensuring that claims are robust and sustainable – an area where experience and insight into the policy’s development becomes particularly important.

How we can help with VAT recovery claims

We have been closely involved in discussions with HMRC on the development of this policy and bring deep technical expertise in VAT recovery for pension schemes. Our involvement in shaping the policy, combined with hands-on experience of submitting and agreeing claims with HMRC, means we can provide clear, practical insight into how the rules are applied and how best to approach a claim.

We have already supported clients in receiving significant refunds across a range of sectors. We can also tailor support to smaller claims, delivering meaningful recoveries for employers and pension schemes across a broad range of claim values.

This policy change represents a significant opportunity for the sector, but time is a key factor. With claims subject to a four-year cap, employers and trustees should act promptly to assess their position and take advantage of the revised rules.

For more information or to discuss how this may apply to your organisation, please contact Richard Holm or your usual RSM contact.