A "SOMEWHAT SURPRISING" intervention by the European Commission has made it unlikely pension funds will be successful in the Wheels VAT case, experts argue.
The European Court of Justice is hearing a case in which Wheels Common Investment Fund, a multi-employer scheme, and the National Association of Pension Funds are battling with HMRC to decide whether funds should be VAT exempt, Accountancy Age's sister publication Professional Pensions reports.
Pension funds could gain up to £100m a year if the case is successful, with the possibility of placing claims backdated over several years.
But at the European Court of Justice last week, the European Commission sided with the taxman to argue that a defined benefit pension scheme is not a "normal collective investment scheme".
It argued there is no reason to extend the VAT exemption because the beneficiary of investment performance in a DB scheme is the employer, with the employee only affected in exceptional circumstances.
Allen & Overy tax lawyer Peter Mendham said the commission's response was "somewhat surprising" because elsewhere pension funds have been included in the exempt categories for a revised Financial Services VAT exemption.
He said: ''Although the commission's view will not be conclusive and certainly does not mean that the case will be decided against Wheels, it does indicate that this is going to be a close-run thing and the odds have definitely shifted in favour of the tax authority.
"DB pension schemes which have been hoping for a small ray of sunlight in the general funding gloom will have to look elsewhere if the hoped-for £100m a year in VAT savings do not materialise."
Grant Thornton UK director of indirect taxes Stuart Brodie said he was "not optimistic at all" about the outcome of the case for DB schemes.
He said: "If you get the commission piling in, you are less likely to be successful. It is a disappointment for the pension funds in that it would be a pretty chunky reclaim."
The Wheels Common Investment Fund, a multi-employer scheme which includes a number of Ford Motor Company pension schemes, and the National Association of Pension Funds brought the case which argues schemes should be exempt from paying VAT.
A spokesman for the NAPF said after the hearing: "The hearing went well and we are confident we have a strong case and look forward to the ruling in the next months."
The case follows an ECJ ruling in favour of JP Morgan Fleming Claverhouse Investment Trust in 2008 which said investment trusts were special investment funds and should be exempt from paying VAT on investment management services.
The Wheels case reached the European court after a Tribunal hearing in London in February last year ruled the ECJ should interpret the scope and meaning of the VAT exemption.
The ruling is expected within the next six months.
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