ECJ Rules that Defined Benefit Schemes Must Continue to Pay VAT

The European Court of Justice (ECJ) has denied UK final salary workplace pension funds a one-off £2bn windfall after its ruling rejected a call for an exemption from paying value added tax (VAT) on some fund manager fees.

The judgment in a legal action dating back to 2008 means that UK pension schemes will continue to pay about £100m in VAT annually and will not be able to make backdated claims to 1990 that could have totalled £2bn, according to the National Association of Pension Funds (NAPF).

“Pension funds were set up to be that vehicles that are free from tax, and they should not be paying these VAT charges,” Joanne Segars, the NAPF’s chief executive officer (CEO), said in a statement responding to the ruling.

The action was initiated by the NAPF and the Wheels Common Investment Fund, which attempted to secure VAT exemption for its defined benefit (DB) pension scheme. Wheels argued that its DB scheme, which holds Ford Motor Company pensions, should be considered a Special Investment Fund (SIF) under the EU VAT Directive and so management services provided to it should benefit from VAT exemption; a claim rejected by the ECJ.

Julia Patterson, director of authorised funds and tax at the Investment Management Association (IMA), commented: “The Wheels case has highlighted the need for more clarity around what is considered a SIF. Costly and lengthy legal cases are not in anyone’s interests.

“A clearer definition of exactly where VAT should, and should not, apply in this area is needed in EU law. It is unfortunate that discussions on the Commission’s proposals on the topic have stalled.”

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