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UK pension schemes set for ‘£2bn VAT windfall’

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Pension schemes in the UK could be about to benefit from a £2bn VAT ‘windfall’ as HMRC implements two European Court decisions relating to the management, administration and investment activities of occupational pension schemes, Baker Tilly said.

Revenue & Customs Brief 43/2014: VAT on pension fund management costs, published this week, sets out HMRC’s position following the CJEU’s decision in Fiscale Eenheid PPG Holdings BV cs te Hoogezand (C-26/12). The case concerned an employer’s entitlement to deduct VAT paid on services relating to the administration of defined benefit pension schemes and the management of their assets. HMRC’s briefing clarifies that where VAT is incurred on defined benefit occupational pension schemes, employers will be able to recover VAT on invoices relating to both the set up and day-to-day administration costs, and the investment management relating to the assets of the schemes.

HMRC also published Revenue & Customs Brief 44/2014: VAT treatment of pension fund management services, setting out HMRC’s position following the CJEU decision in a Danish case concerning VAT and pension fund management services, ATP PensionServices (C-464/12). The CJEU found that a pension fund which pooled investments from a number of defined contribution occupational pension schemes qualified as a special investment fund (SIF) for the purposes of the VAT exemption for fund management services. HMRC’s briefing confirms that defined contribution occupational pension funds should not incur VAT on fees for managing its funds.

Ian Carpenter (Baker Tilly) said: ‘By 2018, up to nine million workers are expected to be automatically enrolled into a defined contribution workplace pension scheme, so the impact of this VAT exemption on a pension fund’s assets will be widely felt. According to the Investment Management Association, some £1.9trn of pension fund assets are managed in the UK. Assuming the OECD average investment management fee of 0.5% of assets managed, then the VAT savings on both defined benefit and defined contribution pension schemes could amount to around £1.9bn.’