UK sponsors will be unable to claim back tax for asset management costs paid on behalf of pension funds, according to the country’s tax office.

The clarification comes in a policy paper by HM Revenue & Customs (HMRC) in response to a 2013 European Court of Justice (ECJ) ruling following a case brought by Dutch engineering firm PPG Holdings.

The HMRC said tripartite agreements – between sponsors, service providers and UK trustees – could still be subject to VAT rebates but would be ineligible for corporation-tax deductions.

“In this context,” it said, “only costs recognised in the profit and loss account and contributions to pension schemes may attract a deduction for corporation tax purposes.

“Direct payment by an employer of asset management costs does not clearly fall into either of these categories.”

In a separate note by Linklaters, the law firm said the PPG ruling resulted in European tax offices no longer being able to distinguish between the treatment of administration costs and those incurred as a result of investment activities.

“This ruling raised issues for HMRC, whose practice has been to let employers recover VAT incurred on scheme administration costs but not on investment costs,” it said. 

In 2014, in the wake of the PPG case, HMRC was forced to update its guidance.

As a result, the tax office said its current approach to taxation would remain in place until the end of 2015 – a practice that has been extended for a further 12 months.

PensionDanmark last year won a separate ECJ court case, brought by its service provider ATP, which saw defined contribution (DC) funds put on par with special investment vehicles.

The ruling allowed PensionDanmark to reclaim DKK200m (€26m) in VAT charges levied against it due to its administration and investment management services.

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