In a Danish case, the Court of Justice of the European Union (CJEU – formerly known as the European Court of Justice) has ruled that occupational defined contribution (DC) schemes can be classed as “special investment funds” in some circumstances and therefore third-party administration expenses for these schemes may be exempt from VAT charges. It remains to be seen how HMRC will interpret this decision.

This is an important decision for DC schemes, as there may now be cases where a fund manager is able to reclaim the VAT originally charged to DC schemes on administration expenses. In turn, pension schemes may be able to seek reimbursement of the VAT paid to fund managers.

Schemes may therefore wish to confirm with their fund managers that a protective claim is made, to ensure that any VAT repayments sought in future are not at risk of being time-barred, because the claim is not made in time.

The decision in ATP PensionService A/S v Skatteministeriet [2014]

The case was brought by ATP, a Danish company providing administration services to occupational pension schemes. ATP challenged the Danish tax authority, suggesting that it should not be charging its pension scheme clients VAT on the costs of providing its services.

Following the opinion of the Advocate General (AG) given in December 2013, the CJEU ruled that an occupational scheme can, if certain conditions are met, constitute a special investment fund for the purposes of the Sixth VAT Directive.

The CJEU held that an occupational DC pension scheme may constitute a special investment fund where the scheme:

  • pools the assets of several beneficiaries, with the beneficiaries bearing the investment risk; and
  • allows the spreading of risk over a range of securities.

The fact that contributions were made by the members’ employers for their benefit under a collective agreement, and that payments out of the scheme were made only on retirement, were both irrelevant provided that the beneficiary had a “secure legal position with respect to her or his assets”. Whether a pension scheme fulfils these requirements will be for the national courts to decide. There may therefore be further litigation in this area, and given that it may take some time to “resolve” the issue, protective claims should be considered sooner rather than later.

A reminder of the VAT position for defined benefit schemes

The ATP decision contrasts with the CJEU’s decision in the Wheels case, which involved a defined benefits (DB) scheme. In Wheels, the CJEU ruled that a common investment fund, in which the assets of several DB schemes were pooled for investment purposes, could not claim exemption from VAT on third-party management fees, as the beneficiaries neither owned the assets, nor bore the investment risks.

However, the VAT position for DB schemes was further considered in the Dutch case PPG in 2013 and, ultimately, the opposite conclusion was reached. Contrary to the AG’s opinion, the CJEU held that VAT charged on management services provided to a DB scheme could be deducted by the employer that had established the scheme, provided there was a direct and immediate link between the services and the employer's economic activities as a whole.

HMRC’s position in relation to VAT recovery in respect of DB schemes

In response to CJEU’s judgment in the PPG case, HMRC announced that it would tighten its treatment of VAT deductions on pension fund management costs. The policy change was effective from 3 February 2014, with a six month optional transitional period available in relation to the existing 70/30 split applying to VAT on investment management costs and those relating to VAT on general management costs.

Under HMRC’s 70/30 treatment, where a single invoice was received by scheme trustees including costs for services in relation to the scheme’s general management combined with its investment management costs, employers could claim 30 per cent of the VAT relating to general management, and the scheme could claim 70 per cent of the VAT relating to investment management.

Under HMRC’s new policy, an employer must establish a direct and immediate link between the supply received and the supply made, in order to deduct VAT on the charge made on its own supplies.

This means:

  • the general management costs of running a scheme are likely to be VAT deductible, but only where the supplies are made directly to the employer; and
  • investment management costs will not generally be VAT deductible by the employer, as HMRC’s view is that the costs have a direct and immediate link to the investment itself, and not to the general costs of the employer.


The ATP case is the third European ruling in the past year on the VAT treatment of pension schemes costs. To the disappointment of the NAPF, which took the Wheels case to the CJEU in an attempt to recoup something in the order of £2 billion paid in VAT by UK schemes, that challenge failed.

The PPG ruling in July 2013 established that DB scheme sponsors could recover VAT paid on administration and management costs in the employer’s day-to-day running of the scheme.

However, as we reported in our update in February 2014, in response to the PPG ruling, HMRC announced that it would tighten its treatment of VAT deductions on pension fund management costs. Although there is a period of grace during the optional transition period, the change may ultimately make many DB schemes and/or employers worse off, since the direct link could be difficult to establish and may be less beneficial overall than the 70/30 split.

As we noted in our reports of the Wheels and PPG cases during 2013, since the members of DC schemes do not bear the investment risks directly, there was a good chance that a future claim for VAT exemption in DC schemes could succeed.

For DC schemes, as a result of the landmark ATP ruling, the VAT future is brighter, and a VAT repayment will obviously be a welcome boost.

Action point for DC schemes: check with fund managers that a protective claim is made for the repayment of VAT.

View the ATP judgment.