Jun 22
On 4 June 2026, HMRC updated its VAT Input Tax Manual and clarified how VAT recovery works for funded occupational pension scheme costs. If you sponsor a defined benefit pension scheme, or another funded occupational pension scheme, your contracts, invoices and payment flow now matter even more.
There was no major announcement. The change appeared in HMRC’s internal guidance, but it may still have a real cost if your current paperwork does not match the recovery route you are using.
The background matters. In June 2025, HMRC changed its policy so employers could, in principle, recover VAT on both administration and investment management costs linked to pension schemes, subject to the normal VAT rules. That was welcome. The June 2026 manual update gives more practical detail, but it also makes life harder for employers relying on older concessionary arrangements. Staying on top of this sits alongside the other shifts covered in our guide to VAT compliance across the UK and Ireland border.
The previous concessionary approach allowed employers to recover VAT on certain pension scheme administration costs even where the trustee contracted for and paid for the services, provided the employer held a VAT invoice in its own name.
HMRC’s updated guidance is stricter. An invoice correctly made out to a trustee cannot simply be re-issued to the employer. Normal VAT invoicing rules apply. If your systems are already moving to digital records, our overview of what Making Tax Digital means for UK and Irish businesses is a useful companion read.
The question is no longer just whether you hold an invoice. It is who contracted for the service, who received the supply, who paid, and whether the VAT evidence follows that structure. A tax accountant supporting your small business can help review whether your current recovery position is still robust.
To keep recovering VAT, you generally need a clear structure in place.
| Route | How it works | Watch out for |
|---|---|---|
| Employer contracts directly | You contract with the supplier, pay for the services and hold a valid invoice in your own name | This must reflect the commercial and trustee position properly |
| Trustee joins your VAT group | A corporate trustee and employer are treated as part of the same VAT group where the conditions are met | Recovery follows the VAT group’s position and may be restricted by exempt supplies |
| Trustee registers and supplies onward | The trustee registers for VAT and charges the employer for running the scheme | This adds compliance work and may create timing or cash flow issues |
Each route has trade-offs, so the right answer depends on your structure, VAT recovery rate and the type of supplies your business makes. Direct contracting can be clean, but it is not always practical where trustees need control over certain services. The same care over structure shows up when businesses grow abroad, which is why our notes on tax planning for UK businesses expanding overseas stress getting the paperwork right early.
Set the structure up well and the VAT recovery can be meaningful, although it remains subject to normal VAT and partial exemption rules. Our cross-border tax and accounting team can help you review the practical options.
This is a UK HMRC issue, so it applies across the UK, including Northern Ireland. If your business operates across both the UK and the Republic of Ireland, you should separate the UK pension VAT position from Irish VAT rules. Groups running staff on both sides will recognise this pattern from our work on cross-border payroll across UK and Irish operations.
Claims for past VAT are normally capped at 4 years, so timing matters. If you under-recovered before, value may be sitting there now and slipping out of reach each month. That is exactly why integrated financial planning pays off.
A quick example makes the risk clear. Picture a mid-sized manufacturer with a legacy defined benefit scheme and annual investment management fees of £120,000 plus VAT. That is £24,000 of VAT each year. Lose recovery because the contract and invoice are wrong, and it becomes a direct cost. Restructure correctly and the position may be recoverable again. Our recovery and restructuring specialists can model the cash impact, and if HMRC queries a historic claim, our forensic accounting team can help evidence your position. You can read the original policy in HMRC’s Revenue and Customs Brief 4 (2025).
Yes. VAT on administration and investment costs can still be recoverable, but only where the contract, invoice and payment route support the claim.
Either may recover VAT depending on the structure. The employer may recover it directly, or the trustee may recover VAT where it makes taxable supplies or charges the employer onward.
VAT Notice 700/17 has not yet been fully aligned with the June 2026 manual position. Treat the updated VAT Input Tax Manual as the clearest current indication of HMRC’s approach.
The normal cap for VAT claims is 4 years, subject to evidence and the usual VAT rules.
If you sponsor a pension scheme, review your contracts and invoicing before your next VAT return. The team at SCC Chartered Accountants can check your current arrangements, model the recovery and fix the paperwork before HMRC asks. Get in touch for a straight answer on where you stand.
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