In the recent case of PPG Holdings BV, the Court of Justice of the European Union (CJEU) held that employers with defined benefit pension schemes established as separate legal entities can reclaim VAT charged on administration and investment management services provided to the scheme in certain circumstances.
PPG had a DB scheme established as a separate legal entity. PPG contracted with (and paid) various service providers for administration, asset management, auditing and consultancy services to be provided to the scheme. These costs were not passed on to the scheme. The case came before the CJEU after PPG sought to deduct the VAT paid on these expenses and were refused by the Dutch authorities.
Necessary criteria to deduct VAT from investment management costs
The CJEU held that an employer can deduct VAT incurred on costs relating to its DB scheme where:
- the employer contracts for the services (and not the scheme);
- the employer pays the service provider directly;
- the costs are not transferred to the pension scheme; and
- there is a direct and immediate link between the services provided and the economic activities of the business.
Great news for employers?
In light of this decision, employers may be able to save on VAT costs relating to their pension schemes in the future and reclaim previous VAT costs incurred. HMRC has always permitted recovery of VAT relating to administrative costs, however denies recovery of VAT relating to investment management expenses.
While HMRC have not yet responded to the judgement, employers may wish to consider submitting a protective claim to HMRC in order to protect their position and prevent loss of entitlement to reclaim VAT paid on investment management services which falls outside the 4 year “capped” period of recovery (as HMRC could take months/years to provide a response to this case that holds any real certainty). Employers/trustees may also wish to consider re-arranging their procedures to ensure they meet the CJEU’s conditions for deducting VAT.