HMRC’s recent pronouncement on VAT is opaque, but the conditions seem to have hardened for sponsors to recover VAT on pension scheme costs, for administration as well as investment management. The key practical point for trustees is to keep responsibilities clear: sponsors decide whether VAT recovery is worth pursuing and whether changes are needed in order to pursue it, and trustees consider whether any proposed arrangement is proper, workable and consistent with scheme governance. While trustees may want to flag the issue, it is not for them to take the initiative.

In 2025 HMRC helpfully recognised that defined benefit pension scheme costs – including for the first time 100% of investment management costs – legitimately fall to the sponsor as part of the cost of sponsoring the scheme.

The June 2026 HMRC guidance has confused the issue. It puts renewed weight on established VAT principles concerning the formalities of who contracts for services, who pays, and how invoices are issued. VAT recovery may depend on direct or tripartite contracts with the employer, trustee VAT registration and on-charging, or VAT grouping. And it appears to apply to trustee administration and adviser services generally, not just investment management fees.

That sits awkwardly with existing practice and scheme governance. Trustees appoint independent advisers to run the scheme and protect members. A structure that helps sponsor VAT recovery may not be automatically right for the scheme.

The trustees’ role

The key point is simple. VAT recovery is for the sponsor, with its tax advisers. The sponsor will know whether it is fully taxable, partially exempt or VAT grouped. Trustees usually will not, and should not, be left to guess.

Trustees do not need to launch a VAT review, redesign contracts or propose new invoicing arrangements. A better approach is reactive and cooperative: flag the issue if appropriate, and consider any sponsor-led proposal.

The test is not “will this improve VAT recovery?”. It is “does this work for the scheme?”. Trustees should consider adviser control, investment oversight, administration, reporting lines, conflicts, member interests and avoidable cost or complexity.

No one-size-fits-all answer 

Scheme circumstances vary. Some trustee companies are VAT registered or use recovery structures, while others have simpler arrangements. Some sponsors can recover VAT in full, while others, including partially exempt businesses, may gain little. Schemes moving towards buy-out may expect costs to reduce significantly.

Scheme rules matter. A sponsor obligation to pay expenses may support the view that costs are employer costs, but that obligation may change near buy-out or wind-up.

The legal structure of the trustee board will also be relevant. Many trustee boards are not corporate entities and not all corporate trustees are subsidiaries of the sponsor (a company limited by guarantee or a professional trustee).

If the sponsor raises it 

If the sponsor raises VAT recovery, trustees can ask three practical questions: what change is proposed, why is it needed and has the sponsor taken VAT advice? Trustees do not need the full tax analysis, but they should be comfortable with what is being asked of them.

If the sponsor wants new tripartite contracts, or even direct contracts with trustee advisers, trustees should ask how oversight and independence will be protected.

If the trustee company is asked to register for VAT or join a VAT group, trustees should understand the administration and compliance burden, cost, and risk. VAT grouping could expose the trustee to the tax liability of other group members.

Trustee action points 

A practical approach for trustees is:

• do not advise on VAT or presume to know the best structure;
• do suggest the sponsor take advice and bring forward any proposal;
• test any proposal against trustee duties and scheme governance;
• if invoicing or payment routes are to change, check that the process is clear, documented and consistent with the scheme rules and funding documents;
• check whether any proposed change would affect who appoints advisers, who instructs them, and who receives advice;
• tactfully say no to changes that weaken independence, accountability or effective scheme operation;
• record the decision in governance terms; and
• ensure that a summary of the sponsor’s tax advice and rationale is provided and recorded, rather than trying to assess the VAT position themselves.