The UK government has accepted rulings from the European Court of Justice (ECJ) on VAT, leading to potential windfalls for both defined benefit (DB) and contribution (DC) pension funds.

The rulings relate to challenges made by Dutch employer PPG and Danish pension fund ATP against their respective tax authorities.

In its ruling for sponsors of DB schemes that pay investment management and administration charges, the UK tax authority, HMRC, said there were no grounds for it to differentiate the two charges, so both could be VAT exempt.

Previously in the UK, for employers, administration charges were exempt from VAT, or 30% of a combined investment management and administration fee.

HMRC said it was also changing its policy on the investment management and administration of the DC funds, accepting that occupational schemes share characteristics with EU special investment funds (SIFs).

This was the argument behind ATP’s successful case against its tax authority, Skatteministeriet, where it said occupational DC pension schemes were SIFs in nature and therefore VAT exempt under EU legislation.

To qualify as an SIF under HMRC’s revised definition, the funds need to pass on investment risk to members and contain contributions from more than one member.

In both cases, where DC schemes and DB sponsors qualify, HMRC said administration and investment management charges should never have incurred VAT, leaving the gate open for reclaims.

UK accountancy firm Baker Tilly said the new stance from the government could result in a potential £2bn (€2.5bn) windfall from the tax authority.

Any refunds would be subject to a four-year capping period, in line with the authority’s existing practice.

In a briefing, the tax authority said: “In support of claims, businesses must be able to produce evidence to demonstrate they have accounted for VAT on the relevant services and must be able to substantiate the amount claimed.

“HMRC will not accept estimated claims.”

It was previously anticipated that HMRC would amend the existing guidelines in the wake of the ATP case, with the authority saying earlier this year it was reviewing the outcome of the case.