On 18 July 2012, the Court of Justice of the European Union (CJEU) issued its judgment in the Dutch reference: Case C-26/12 PPG Holdings BV. Contrary to the Opinion of the Advocate General, the Court held that VAT charged on fund management services provided to a pension fund could be deducted by an employer which had established a pension fund for its employees, provided that the employer could establish the usual link between the VAT costs incurred and the employer’s economic activities as a whole.
This represents a major change for the UK VAT treatment of pension fund managers’ costs. Hitherto, if a VAT registered employer set up a pension fund for its employees under a trust deed, the VAT incurred in both setting up the fund and on its day-to-day management was treated by the UK tax authority (HMRC) as recoverable input tax by the employer. HMRC has applied this treatment even where responsibility for the general management of the scheme rests (under the trust deed) with the trustee, or the trustees pay for the services supplied. However, HMRC has not permitted the employer to recover the VAT on investment activity costs, which makes up the majority of the fund managers’ fees. As a simplification measure HMRC permitted employers who received a single invoice from fund managers for both management and investment activity to recover 30% of the VAT on the invoice as a proxy for the management activity of the fund manager. This treatment was widely adopted in the UK market.
In order to defend this position, that 70% of the cost was not recoverable, the UK intervened in the PPG case and made both written and oral submissions. The UK argued that because the fund was legally and fiscally separate from the trading business, PPG could not recover the VAT paid on investment activity costs since those inputs were used by the fund rather than the employer business. The Advocate General agreed with this approach. She also agreed with the UK’s submission that VAT incurred by the employer in setting up the pension fund, enrolling employees in the fund, ensuring that its own contributions are made timeously, and so on could be recovered as input tax by the employer (i.e. the costs of managing the administration of the fund).
The CJEU took a different approach and held that a taxable employer which has set up a pension fund in the form of a legally and fiscally separate entity, is entitled to deduct the VAT it has paid on services relating to the management and operation of that fund, provided that the usual test for input tax recovery is satisfied; that is to say that there is a direct and immediate link between the input costs and the taxable transaction of the employer.
HMRC has said that it will issue guidance to taxpayers in the light of PPG. It is understood that HMRC will pay claims that certain employers have already made and we eagerly await the detail of HMRC’s position. There is a significant opportunity for employers with pension funds to review the VAT recovery position of fund managers’ costs. In PPG the CJEU was clear that costs relating to both management and investment activity were recoverable (subject to the usual VAT recovery rules). It is important therefore to review the VAT treatment of pension fund managers’ costs in other EU member states to see if the local treatment is in line with PPG. If it is not there may be an opportunity to make retrospective claims for under claimed input tax.