The National Association of Pension Funds’ legal challenge to save pension schemes around £100m a year in VAT could be scuppered after the European Commission opposed the move at the European Court of Justice.
The NAPF and Wheels Common Investment Fund Trustees, the Ford pension fund, launched the case in 2008 to establish whether workplace defined benefit schemes should be subject to VAT on investment management services.
It followed an ECJ ruling on the JP Morgan Fleming Claverhouse investment trust which found that as investment trusts were special investment funds they should be exempt from VAT on investment management services.
The Wheels case was referred to the ECJ in February by a London tribunal to define the scope of the special investment funds exemption.
At the hearing at the ECJ last week, the European Commission argued against granting an exemption to DB pension funds. It agreed with HMRC’s arguments that workplace schemes are not exempt as they are restricted to employees and the benefits are guaranteed. HMRC and the EC also argued contributions are not investments but amounts paid in exchange for future rights to specific retirement payments, and that there are no provisions for contributions to be withdrawn.
Grant Thornton UK director of indirect taxes Stuart Brodie says the EC’s objection makes the exemption less likely.
He says: “It is safe to say it does not look hopeful. We did not know up until the hearing last week that the European Commission was against it. Now we know this is the case it looks less hopeful than a few years ago when the case was launched.”
The NAPF declined to comment on the EC’s opposition to its case. Ahead of the hearing NAPF chief executive Joanne Segars said: “This has been a long battle. We feel we have a strong case and that DB pension funds should not have to pay VAT on investment management services.”
An opinion statement on the case is expected in the next few months, followed by a final ruling.
Brodie adds that were an exemption to be secured it could mean an increase in fund management costs as fund managers would no longer to be able to recoup VAT on their business costs.
Yellowtail Financial Planning managing director Dennis Hall says: “Once exempt supplies start being introduced it impacts on how much VAT can be claimed back on services they buy. It is not a net win. Dealing with the 10 per cent withholding tax that used to be reclaimed by pensions would be a much easier win than messing with VAT.”