The Court of Justice of the European Union has ruled that the management of defined contribution schemes may be VAT exempt

What happened?

The Court of Justice of the European Union has ruled that the management of defined contribution schemes may be VAT exempt.

The court reached this decision on the basis that DC schemes may be managed in a similar way to certain “special investment funds” which are VAT exempt. This case, which originated in Denmark, is known as the ‘ATP case’ and was intended to clarify in what circumstances a fund would be deemed similar enough to a VAT exempt fund to avoid the tax.

The Danish court identified the following criteria

 ● The pension scheme must be funded by the employee, regardless of whether or not the actual payment is made by the employer

● The scheme must work on the principle of spreading investment risk

● The employee must ultimately bear the investment risk, so if their funds underperform they will receive less money

What does this mean?

This presents a challenge to HMRC as its current stance is that DC scheme management would be subject to VAT.

Fund managers may be able to claim back VAT charged to schemes for their administration expenses, and could potentially pass that saving back to the pension scheme.

It differs from the Wheels case that found that defined benefit schemes were subject to VAT because the beneficiaries were not responsible for meeting the costs or bearing the risk.

What next?

HMRC will have to conduct a review of its policy on the VAT implications of managing DC schemes. “There is always a possibility that HMRC may identify some distinguishing factor that could negate the ruling’s application in the UK,” says Robert Facer, a VAT expert from Moore Stephen