European court rules DC pensions could be exempt from VAT

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The Court of Justice of the European Union (CJEU) has ruled that defined contribution (DC) pension schemes could be exempt from value-added tax (VAT).

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In case of ATP Pension Services, the CJEU has concluded that a DC pension arrangement may qualify as a special investment fund, meaning that fees for managing such a fund should be exempt from VAT, if:

  • The scheme is funded by the pension members.
  • The funds are invested on a risk-spreading basis.
  • The pension recipients bear the investment risk.

The decision is in contrast to the CJEU’s decision, in March 2013, that defined benefit (DB) pension schemes are not exempt from payments of VAT.

That decision ruled that DB schemes are not special investment funds and so are not exempt from VAT on investment management services.

According to a statement by accountancy firm Smith and Williamson: “This seems capable of being applied, retrospectively, to many UK pension funds and is likely to lead to pension scheme trustees looking to their fund managers for VAT refunds. 

“For the fund managers, this is bad news. It will involve submitting a claim to [HM Revenue and Customs] HMRC, and recalculating a number of their past VAT returns and handing back possibly significant sums of input VAT that they had previously recovered. 

“HMRC has not yet commented on how the case will affect UK VAT policy. We expect it to confer with the industry before issuing any guidance on backdated claims or the future treatment of pension fund management fees.”

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Gary Campbell, tax partner at Deloitte, said: “Defined contribution pension funds should contact their suppliers to determine whether their supplies should have been exempt from VAT as ‘management’.

“Where VAT has been incorrectly charged, then they should contact the relevant suppliers to request a refund of this VAT and protect their position for the last four years.”

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