While fund management services are generally subject to VAT, EU law applies a VAT exemption to the management of special investment funds (SIFs). Historically, HMRC did not regard pension funds as SIFs and so, until recently, fund managers have had to charge VAT on their pension fund management fees.

However, the CJEU ruled in the ATP PensionService A/S v Skatteministeriet [2014] Case C‑464/12 that a defined contribution pension scheme is a SIF, because the employee contributes to the scheme and bears the risk of the investment. This means that the services of managing and administering such funds are exempt from VAT.

In Revenue & Customs Brief 44 (2014) HMRC accepts that pension funds with the following characteristics are SIFs and, therefore, that the management of those funds is eligible for exemption from VAT:

• They are solely funded (whether directly or indirectly) by persons to whom the retirement benefit is to be paid (i.e. the pension scheme member), and for this purpose, ‘indirect’ funding refers to contributions paid by the employer
• The pension scheme members bear the investment risk
• The pension fund contains the pooled contributions of several scheme members
• The risk borne by the pension scheme members is spread over a range of securities
• UK legislation is to be amended in due course, but HMRC says that taxpayers may, if they wish, apply this interpretation now by relying on the direct effect of EU law. Claims are invited from fund managers for output tax overpaid, subject to the normal rules on capping and unjust enrichment, but HMRC says it is still considering the wider implications of the judgment and may issue further guidance at a later date.

This only affects defined contribution pension schemes. Defined benefit schemes were ruled – in an earlier CJEU decision – not to be SIFs and so do not qualify for the exemption for management and remain liable to VAT.

Where the management of a pension fund does not qualify for exemption (i.e. typically because it is a defined benefit scheme), VAT recovery may be available to the employer. This follows the PPG decision, and may provide some relief for the VAT cost which any charities operating a defined benefit scheme will incur.

From 1 January 2016, employers have been able to reclaim input VAT on pension fund management and administration only if the normal rules for VAT recovery are met, i.e. it commissions and engages the supplier, receives and pays the invoice and bears the cost. The previous 30/70 concession therefore ended on 31 December 2015. Revenue & Customs Brief 43 (2014), supplemented by Revenue & Customs Brief 8 (2015), explains HMRC’s policy on an employer’s entitlement to recover the VAT paid on management fees.

This is a complex area and charities with defined benefit contribution schemes that have a sufficiently high rate of VAT recovery on expenditure to benefit from VAT recovery on management fees should take professional advice.