On 7 March, the Court of Justice of the European Union (CJEU), Europe's highest civil court, delivered its judgment in the long-running dispute between the Wheels Common Investment Fund and HMRC. The dispute concerned the VAT treatment of investment management costs paid by DB schemes and their associated common investment funds (CIFs).


Under European Union legislation, the management of special investment funds is exempt from VAT. One of the principal purposes of the legislation is to apply the same VAT treatment to direct and indirect investments. The court was asked to decide whether UK DB pension schemes and CIFs used to pool and invest the assets of several DB schemes are special investment funds.


The court decided DB pension schemes and their CIFs are not special investment funds (and therefore must pay VAT on fund management costs) as they are different from other arrangements treated as special investment funds. The decision highlighted the following differences:

  • DB schemes are an employment-related benefit and unlike recognised special investment funds are not open to the public.
  • Unlike recognised special investment funds, under a DB scheme, the value of a member’s pension is not directly dependent on the performance of the fund's investments.
  • Sponsoring employers' contributions are made in connection with a legal obligation and so are not comparable to those made by investors into common investment schemes that are treated as special investment funds.


The result of the judgment is that, for the moment, DB schemes and their CIFs must continue to pay an estimated £100 million in VAT on management fees for segregated investments. The European Commission, however, is reviewing the VAT Directive and industry bodies will be lobbying hard to have investments made by DB schemes and their CIFs treated as VAT exempt.

This is also not the end of the story on disputes about the VAT treatment of pension funds. Next year, the CJEU is due to consider whether services provided in respect of certain Danish DC type pension arrangements should be VAT exempt.