There has been some confusion as to whether pension funds are exempt from VAT and contrasting decisions from several tax case rulings.

Investment management services are normally taxable, but where they are provided to special investment funds they are exempt.

A series of cases brought before the Court of Justice of the European Union (CJEU) examined whether pension funds should be regarded as special investment funds for this purpose – although the position is still far from clear.

Contrasting decisions

In one recent case (Wheels Common Investment Fund Trustees Ltd and Others v HMRC), it was held that a defined benefit pension scheme did not qualify as a special investment fund, while in another (ATP PensionService A/S v Skatteministeriet) the court ruled that a defined contribution pension scheme may qualify.

It is now for HMRC and the UK courts to decide where the line should be drawn, and how these contrasting decisions can be incorporated within a coherent VAT policy.

The ATP decision

The rationale behind the ATP decision was that although a defined contribution pension fund was not covered by the UCITS (undertakings for collective investment in transferable securities) Directive, it may be regarded as akin to a collective investment scheme if the:

  • scheme is funded by the members
  • funds are invested on a risk-spreading basis
  • pension recipients bear the investment risk.

The defined benefit schemes considered in the Wheels case did not satisfy these criteria.

A delicate balance

The court's decision in the ATP case may open the door for backdated claims where VAT has been charged on the management of defined contribution schemes.

Both Wheels and ATP have been handed back from the CJEU to the referring courts to determine how the rulings should be applied in their particular circumstances. HMRC has yet to issue any official response to ATP. It is likely to wait and see how the rulings are applied, and then consult widely before making any changes to its existing policy. As always, there is a delicate balance to be maintained between correctly and narrowly implementing a mandatory VAT exemption, and ensuring a level playing field for the industry.

Claiming a VAT refund

In the meantime, pension fund trustees will need to review their position. Some pension funds may already receive investment management services free of VAT under other provisions. For the rest, the trustees should now be approaching their fund managers to ask for a retrospective VAT refund.

Fund managers will find themselves in the unenviable position of having to bear the cost of making VAT refund claims to HMRC without obtaining any of the benefit, since any refund must be passed on to the funds which originally bore the VAT burden. That's not all: backdating the exemption of these services will affect the fund manager's partial exemption position and HMRC will expect all claims to be reduced by the amount of input VAT previously recovered in respect of their pension fund management activities.

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