The latest ruling by the Court of Justice of the European Union (CJEU) in Case C‑464/12, involving the Danish pension provider ATP Pension Service A/S, focused on whether the management of a DC scheme is VAT exempt.

This follows a preliminary ruling on the interpretation of Article 13B(d)(3) and (6) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the member states relating to turnover taxes. In October 2013, the CJEU initially ruled that defined benefit (DB) pension schemes cannot take advantage of a VAT exemption when paying for investment management services.

‘The key point in the CJEU’s decision was whether a DC pension scheme is sufficiently comparable to other kinds of “special investment fund” where the management is already allowed to be exempt. If a DC scheme is sufficiently comparable, under the VAT principle of fiscal neutrality, the management of it must also be exempt,’ said Robert Facer, associate at Moore Stephens.

In deciding whether or not a DC pension scheme met the criteria to be judged a ‘special investment fund', the court identified three requirements:

• it must be funded by the employee, although the physical payment can made by the employer;
• it must operate on the principle of spreading investment risk; and
• the employee must bear that investment risk.

Facer said: ‘The court concluded that if certain conditions were met, then a DC scheme was sufficiently close to other types of schemes in which an individual might invest. Therefore, the management of such DC schemes must also be covered by the exemption in order not to breach fiscal neutrality.

‘The ATP case is important as it is the latest in a series of rulings that have broadened the scope of the VAT exemption on the management of funds. HMRC had dismissed the idea that pension schemes might be affected, but now we finally have a case that challenges this stance.’  

Many DC schemes in the UK already benefit from VAT exemption as they are based on insurance contracts, but this ruling suggests that the VAT liability of administration-type services supplied on an outsourced basis to DC schemes could be challenged.

Facer said: ‘Schemes that currently pay VAT on their management fees and have already filed protective claims with HMRC should be pursuing those claims. Where a claim has not yet been made but a DC scheme manager has been charging VAT, the manager and the fund should urgently consider the position, bearing in mind that there is a four-year time limit for VAT claims.’ 

The CJEU ruling is here: http://curia.europa.eu/juris/document/document.jsf;jsessionid=9ea7d2dc30dcfbda99dca6514a1c84f69a139eac47bd.e34KaxiLc3qMb40Rch0SaxuMchf0?cid=466712&dir=&docid=149126&doclang=EN&mode=req&occ=first&pageIndex=0&part=1&text