The Irish Revenue Commissioners has recently updated their guidance on the VAT treatment of management services supplied to pension funds and the VAT deductibility in respect of pension fund costs following the decisions of the Court of Justice of the European Union (CJEU) in three recent cases.

VAT treatment of management services supplied to pension funds

Prior to the CJEU decisions, management services supplied to pension funds were typically subject to VAT. However, the decisions have clarified that the VAT treatment in respect of such services differs for defined benefit schemes and defined contribution schemes.

In the first of these cases, the CJEU found that certain defined contribution pension schemes constituted "Special Investment Funds" and therefore the management of those specific pension schemes should be exempt from VAT. In order to give effect to this decision, the exemption from VAT has been expanded to cover the management of certain defined contribution pension schemes (excluding one-member arrangements), effective from 1 March 2015.

However, in the second of the CJEU cases, it was held that a defined benefit scheme could not be regarded as a “Special Investment Fund” for VAT purposes. As a result, it is clear that VAT is chargeable on fund managers’ fees, which confirms the current treatment in Ireland. Consequently, fund managers should continue to charge VAT at 23% on services to defined benefit pensions schemes.

VAT deductibility in respect of pension fund costs

In the past, Revenue has accepted that the setting-up, administration and on-going management of a pension fund was part of an employer’s business and VAT incurred on expenses in connection with these activities was deductible to the extent that the employer was engaged in taxable activities. VAT was not deductible in certain circumstances such as where the expenses incurred related to management of the assets of the fund.

However, in a third recent CJEU decision, it was held that an employer is entitled to deduct VAT paid on services relating to the management and operation of a pension fund it had set up for its employees under certain circumstances. As a result of this decision, Revenue now accepts that an employer is entitled to deduct VAT in respect of costs incurred in the setting up, ongoing management, administration and management of assets of a pension scheme where certain conditions are met.