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Adviser Q&A: PPG Holdings and VAT recovery for pension funds

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The recent CJEU judgment in PPG v Inspecteur van de Belastingdienst/Noord/kantoor Groningen (C-26/12) suggests that employers are entitled to deduct VAT on management services provided to staff pension funds if there is a direct and immediate link between the cost of the services and the employer’s economic activity as a whole.

What were the key issues in this case?

PPG set up a pension fund as a separate legal person for the benefit of its employees under Dutch law. PPG arranged for third party service providers to provide both management and investment services to the pension fund.

At issue was whether PPG could recover the VAT charged to it by the third party services providers as being a cost component of its business. Effectively, the CJEU was being asked whether, in substance, the third party service providers were supplying services to PPG or the pension fund.

It is worth noting that PPG found itself in a worse position than an equivalent sponsor employer under UK law. Under HMRC’s Note 700/17, a sponsor company is allowed to treat any management services supplied by the third party service providers as being attributable to its business. However, this is not the case for investment management services.

What was decided?

The CJEU decided that the sponsor company ‘is entitled to deduct the VAT [it] has paid on services relating to the management and operation of that fund, provided that the existence of a direct and immediate link is apparent from all the circumstances of the transactions in question’.

The CJEU did not decide which services have a direct and immediate link to PPG’s business. It is for the Dutch national courts to determine if the services supplied to PPG are attributable to its business applying the direct and immediate link test.

What about Wheels?

In Wheels Common Investment Fund Trustees Ltd [2013] All ER (D) 117 (Mar), the CJEU held that investment management services supplied to defined benefit pension schemes were VATable rather than VAT-exempt.

The CJEU’s judgment in PPG may allow sponsoring companies to open a ‘second front’ on the investment management services point. Under this approach, the sponsoring companies would argue that there was a ‘direct and immediate link’ between the investment management services supplied and their businesses, allowing there to be enhanced VAT recovery to the extent to which they are fully VATable businesses. However, HMRC’s response to this approach is as yet unknown.

What are the wider implications?

The PPG judgment is relevant to all UK schemes, whether defined benefit or defined contribuion. When assessing the wider implications, it is important to consider how the UK approached the PPG litigation in the hearing before the CJEU. The UK made an intervention before the advocate general, which was partially in favour of PPG. The UK argued that its own interpretation of the VAT recovery position (as described previously) was the correct one. Going forward, it should be remembered that the CJEU merely set out the ‘direct and immediate link’ test, but it did not decide which services have a direct and immediate link to the sponsor company’s business. This is a question for the national court to decide.

Sponsor companies may wish to argue that on their own factual circumstances the investment management services supplied have a ‘direct and immediate’ link with their businesses. HMRC has not yet set out its position on the effect of the PPG judgment. However, sponsor companies should note the approach taken by the UK before the advocate general, and be alert to the point that HMRC may argue that the current position, as set out in Note 700/17, is fully consistent with EU law.