Employers may be able to reclaim additional VAT on pension fund costs following a surprise ruling from the Court of Justice of the European Union (CJEU).
The shock ruling concerns PPG Holdings BV, the second of a trilogy of cases concerning pension schemes working their way through the CJEU. The PPG case addresses two questions: firstly, whether the management of an occupational pension scheme, in this case a defined benefit scheme, is VAT exempt; and secondly, if the management is not exempt, how much of the VAT can be claimed by the employer that set up the scheme?
The CJEU ruled on 18 July that the management of a defined benefit occupational pension scheme is not VAT exempt. This was expected, being in line with both a previous CJEU ruling (Wheels) and the Advocate General’s opinion on PPG, released in April.
On the second matter, however, the Court has taken a different view to that of the Advocate General – an unusual event and the reason for the widespread surprise. The CJEU has determined that, subject to certain conditions, the employer should be able to reclaim VAT on both the day-to-day management of the scheme and the management of the scheme’s investments as well. The Advocate General had suggested VAT was reclaimable on day-to-day scheme management, but not on investment management activity.
The CJEU’s decision challenges HM Revenue & Customs’ current policy. “The ruling is causing considerable excitement,” says Moore Stephens VAT expert Robert Facer. “It raises the possibility that businesses may be able to not only reclaim more VAT in future, but also put in retrospective claims for VAT incurred in the last four years on investment management.”
Clarification of the UK tax authority’s position may not emerge for some months. “It’s likely that HMRC will try to find a reason to distinguish the facts in the PPG case from the typical UK scenario,” Robert cautions. “There are a couple of areas on which HMRC could focus.” For example, the impact of the CJEU ruling could be limited by the fact that, in order for an employer to reclaim VAT, the employer must have entered into the contract for investment management services with the third party supplier. “That may not always have occurred,” Robert says. “The fund itself may have contracted with the investment manager directly.”
Nevertheless, the ruling does open up the opportunity for potentially substantial VAT reclaims. “If an employer’s circumstances are sufficiently similar to those of PPG, then the employer should consider making a protective claim to HMRC as soon as possible”, Robert advises. Although the PPG case concerned a defined benefit scheme, employers running defined contribution schemes should also consider making a protective claim, as the same principles should apply. “We will then need to wait and see how HMRC responds. But given that it may be months or years before we have final certainty on this issue, employers should protect their position now, given that claims can only be made for VAT incurred in the past 4 years.”