Pension funds lose £2bn HMRC VAT case

The Court of Justice of the European Union (CJEU) has ruled that the UK’s workplace defined benefit (DB) pension funds are not special investment funds and are therefore not exempt from paying VAT on investment management services.

The ‘deeply disappointing’ judgment means that pension schemes will have to keep paying out around £100m a year in VAT and will be unable to make backdated claims of up to £2bn dating back to 1990.

The long-running case against HMRC was brought by the National Association of Pension Funds (NAPF) and Wheels Common Investment Fund (WCIF), with its underlying Ford pension schemes.

The action began in 2008 following a ruling in the European Court on JP Morgan Fleming Claverhouse Investment Trust plc. The court stated then that investment trusts were special investment funds and should be exempt from paying VAT on investment management services.

The NAPF and WCIF brought the case because they believed that pension funds have similar characteristics and should have a similar exemption.

A tribunal hearing held in London in February 2011 referred the matter to the CJEU to interpret the scope and meaning of the VAT exemption.

Joanne Segars, chief executive of the NAPF, said: ‘This has been a long struggle, and unfortunately the judgment is deeply disappointing. Pension funds were set up to be vehicles that are free from tax, and they should not be paying these VAT charges.

‘The European Commission is currently reviewing the VAT Directive, and we will be making strong representations as to why the management of pension funds should be VAT exempt under the proposed change to the current VAT regime. We will be taking this matter up with the Commission as a matter of urgency.’

Amanda Brown, partner at KPMG, who advised the NAPF and WCIF on the case, said: ‘This judgment is disappointing. The EU Commission’s own review of the EU VAT regime for financial services suggests that the management of pension funds will be treated as VAT exempt. I think the CJEU missed an opportunity to ensure that the current provisions reflect what is in practice, the investment decisions that the vast majority of small investors take.’

Lorraine Parkin, head of indirect tax at Grant Thornton, said: ‘A significant amount of money was riding on this judgement. Had the judgment been that occupational schemes were to be regarded as Special Investment Funds, it may have been possible for schemes to have claimed substantial sums, via the fund managers, to recoup the VAT previously charged by them. This ruling from the CJEU means that this will no longer be possible which is no doubt a blow to many funds but probably has HM Treasury breathing a sigh of relief.’

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