CJEU decision on pension fund investment management costs could allow for historical VAT recovery, say experts

Darren Mellor-Clark of Pinsent Masons, the law firm behind Out-Law.com, said that the decision by the Court of Justice of the European Union (CJEU) "appears to usurp HMRC's historic policy of allowing employers to recover VAT on costs relating to administration while treating VAT on investment management fees as recoverable only by the pension fund itself".

"Employers should consider the decision carefully in terms of optimising VAT recovery on investment management fees going forward," he said. "Depending on the precise facts, there may well be considerable scope for significant retrospective claims in addition. Trustees of pension funds would also be well advised to discuss these developments with scheme employers to ensure appropriate action is taken."

The CJEU ruled that Dutch industrial group PPG Holdings BV was entitled to recover VAT it paid on investment management costs, providing that it did not pass these costs on to the pension fund. Its decision went against an earlier opinion by one of the court's Advocate Generals, who had said that companies should not be able to offset this VAT against their own costs because a company and its pension fund are both legally and fiscally distinct.

PPG Holdings set up a fund for employees into which it paid contributions. It contracted with various service providers for the management of the fund and paid for those services, including any VAT charged. Following a dispute with the Dutch tax authorities as to the deductibility of the VAT incurred on those services, the matter was referred to the CJEU for a ruling.

PPG bought in services relating to both the administration of the pension scheme and the management of the scheme's assets from a third party. These costs were not passed on to the pension fund. PPG argued that it should be entitled to recover VAT on these costs because there was, in the words of EU VAT requirements, a "direct and immediate link" between those costs and its general business.

In its ruling, the CJEU said that if PPG did not have the right to deduct the input tax paid, "not only would [it] be deprived, by reason of the legislative choice to protect pensions by a legal separation of the employer from the pension fund, of the tax advantage resulting from the application of the deduction system, but the neutrality of VAT would also no longer be guaranteed".

"It should be recalled at the outset that the deduction system established by [the legislation] is meant to relieve the operator entirely of the burden of the VAT paid or payable in the course of all his economic activities," it said.

The CJEU noted in its judgment that the Dutch tax authorities had suggested that there were "other means than setting up a fund in the form of a legally and fiscally separate entity" by which PPG could comply with its legal obligations. However, this being a relevant factor "would amount to restricting the freedom of taxable persons to choose the organisations structures and the form of transactions which they consider to be most appropriate for their economic activities and for the purposes of limiting their tax burdens", the court said.

Had their case been unsuccessful, PPG had also asked the CJEU whether the pension fund could be regarded as a 'special investment fund' and therefore exempt from VAT under the legislation. VAT expert Suzanne McMahon of Pinsent Masons said that had it gone on to consider this issue, PPG would have been unsuccessful given the CJEU's decision in March that defined benefit (DB) pension schemes were not special investment funds.

"Following the disappointing but not unexpected decision in that case, the PPG decision does potentially open up the possibility of businesses being able to recover VAT on investment management costs paid out where VAT was not recovered at the time," she said. "However, for such claims to succeed, it is likely to be necessary to establish that it was the employer that has contracted with and paid for the services on which VAT recovery is now sought."