ECJ VAT pension issue to continue, say advisors

THE EUROPEAN COURT OF JUSTICE DECISION to continue imposing VAT on fund management fees incurred by occupational pension funds is unlikely to draw a line under the issue, practitioners have warned.

Despite the ruling, the European Commission is also currently reviewing the VAT treatment of financial services, and according to indirect tax experts there could be further chnages to the way in which investment management services are taxed.

"Although I don't think we've heard the last of this story yet, I do suspect we'll be waiting a long time before we can draw a line under it," Baker Tilly's head of VAT Ian Carpenter said.

The case, brought by the National Association of Pension Funds (NAPF) and Wheels Common Investment Fund in 2008, could have seen the appellants recoup as much as £2bn in backdated VAT on investment management services for defined benefit schemes. Defined benefit schemes generally pay around £100m in VAT per year on investment services.

In their submissions, the NAPF and Wheels held that pension funds should be granted the same VAT exemption as special investment funds are with regards to management services.

However, the court took the view that that an occupational scheme is, in fact, not open to the public but instead constitutes an employment-related benefit that employers grant only to their employees.

It is a decision which is likely to be hugely disappointing for pension funds which, despite designed to be exempt from tax, will still have to have to pay VAT on fund management fees.

Grant Thornton head of indirect tax Lorraine Parkin added: "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."