EUROPE – Tax experts have argued that a value added tax (VAT) exemption could be extended to defined contribution (DC) pension funds in future due to their structure.
Following the Court of Justice of the EU (CJEU) ruling against the Wheels Common Investment Fund (WCIF) last week, Richard Asquith, head of VAT at TMF Group, told IPE the key difference between a number of VAT lawsuits brought by pension funds to the EU court lied in the structure of the schemes themselves.
"Contrary to the case involving defined benefit plans ruled last week, the doors are very much open to pension fund managers running DC schemes," he said.
"While in the case of a DB scheme the final pension is predetermined in advance, and the risk stays with the employer, DC plans are all about individual employees and the risk they bear since their pensions sorely depend on the performance of the fund."
The CJEU ruled that UK workplace defined benefit (DB) pension funds were not special investment funds and therefore not exempt from paying VAT on investment management services.
The UK National Association of Pension Funds (NAPF) and the WCIF filed the lawsuit in 2008 following a ruling by the CJEU on the JP Morgan Fleming Claverhouse Investment Trust.
At the time, the court stated that investment trusts were special funds and should be exempt from paying VAT on investment management services.
Following the ruling, the NAPF and the WCIF, which manages Ford Motor Company's pensions, brought a similar case against HM Revenue & Customs to a UK court of justice, arguing that pension funds had similar characteristics and therefore should enjoy a similar exemption.
A tribunal hearing held in London in February 2011 referred the case to the CJEU.
Graham Wrightson, pensions partner at law firm Stephenson Harwood, echoed Asquith's thoughts and said that, "as ever", the specific facts of the case were crucial.
"The Wheels fund was a pooled fund for assets of the defined benefit pension schemes of the Ford Motor Company," he said.
"Whilst the fund had a number of characteristics that pointed towards it being a 'special investment fund' and therefore exempt from payment of VAT on investment management services, the key differentiators appear to have been that it constituted an employment-related benefit, and members did not bear any investment risk," he said.
Wrightson went on to point out that investment services provided through open-ended investment companies or authorised unit trust schemes continue to be exempt from VAT.
"So, for the most part, defined contribution schemes, as well defined benefit schemes that have structured their investments appropriately, should be in the clear," he said.
A similar case involving a Dutch pension fund, PPG, was referred to the CJEU in January last year by a local court of justice.
PPG, which set up a separate company pension fund in accordance with Dutch pension legislation, argued that it incurred all costs related to pension fund administration services, investment management services, audit support services, advisory related to the administration of the pension fund and actuarial services and should therefore be exempt from paying VAT.
However, the Dutch tax authority argued that these costs were not incurred for the benefit of PPG but for the benefits of the company pension fund, a separate legal entity. It therefore required PPG to pay VAT.
Asquith said: "Contrary to the Wheel case, the lawsuit brought by the Dutch scheme PPG is much more akin to JP Morgan Fleming Claverhouse Investment Trust for which the ECJ gave a positive ruling in 2008 in the sense that it is a DC scheme.
"Therefore, pension experts tend to be more optimistic about the outcome of the PPG case and its capacity to obtain a positive ruling."
Asquith finally argued that, in the event that the CJEU were to hand down a positive ruling in the PPG case, all EU member states would need to comply with the decision and exempt DC schemes from VAT.
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