The European Court of Justice (ECJ) will examine whether defined benefit (DB) pension schemes should pay value-added tax (VAT) on investment management services.
The case under examination involves Wheels Common Investment Fund (WCIF), a multi-employer scheme, and the National Association of Pension Funds (NAPF), after a tribunal in London in February 2011 decided that the ECJ should interpret the meaning of the VAT exemption.
If the ECJ rules that investment services should be exempt from VAT, it could mean HM Revenue and Customs (HMRC) faces claims for back-dated VAT recovery, which estimates put anywhere from £100 billion to £300 billion, said Martin Jenkins, national head of pensions at law firm DWF.
He added that this case is being used as a test case because it relates to such a large number of pension schemes and a long track record of the VAT relief which should have been recovered.
“VAT on pension funds has always been covered by more convention than a defined law, and there has been an accepted convention that it is not possible to recover VAT in investment expenses,” said Jenkins.
He added that the issue of VAT on investment services has long been a consideration, but because investment returns are lower and pensions are in deficit, paying out VAT is more of an issue than previously.
If the judgment, which could still take two or three years, is made in favour of no VAT recovery, the government could bring in regulation very quickly that changes the law to prevent the recovery of VAT going forward, said Jenkins.
