PPG Holdings (the employer) set up a pension scheme for its employees and one of its subsidiaries engaged contractors to provide scheme administration and fund management services. The employer deducted the VAT on these invoices from its own VAT return, but the Dutch tax authorities rejected this and referred the case to the CJEU.

On 18 July 2013, the CJEU ruled that VAT charged on management services provided to a pension fund could be deducted by the employer that had established the pension fund and paid for the services, provided there was a direct and immediate link between the services and the employer's economic activities as a whole.  

In so ruling, the CJEU declined to follow the Advocate General’s opinion, but confirmed established case law principles that input tax recovery is permitted if: 

  • there is a ‘direct and immediate link’ between a particular input transaction and a particular taxable output transaction (Commissioners of Customs and Excise v Midland Bank plc (Case C-98/98) and Abbey National (Case C-408/98)); and  
  • the costs in relation to which the input tax arises are part of the taxable person’s general overheads and form a component of the price of goods or services provided by that person. Such costs have a direct and immediate link with the taxable person’s economic activity as a whole (Kretztechnik AG v Finanzamt Linz (Case C-465/03)). 

The CJEU ruled that whether the cost of the management services formed part of the employer’s general costs – such that they are recoverable as general overheads – is a matter for the referring court to verify.

In the light of its decision on deductibility, and the CJEU's previous decision inWheels Common Investment Fund Trustees Ltd and others v HMRC [2013] (Case C-424/11), the CJEU declined to answer whether the services provided to the pension fund fell within the VAT exemption for management services provided to ‘special investment funds’.  

As a result of this decision, businesses should consider whether they could be entitled to recover the VAT incurred on their pension fund’s management services and whether they would like to make a protective claim to HMRC.