HM Revenue and Customs Brief 06/14
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Issued 3 February 2014
VAT: CJEU judgment regarding deduction of VAT on pension fund
management costs (PPG Holdings BV - C-26/12)
1. Purpose of this Brief
This brief sets out HM Revenue & Customs' (HMRC)
position following the decision of the Court of Justice of the European
Union (CJEU) in Fiscale Eenheid PPG Holdings BV cs te Hoogezand (PPG).
The case concerned an employer’s entitlement to deduct VAT paid on
services relating to the administration and management of a defined
benefit pension scheme.
The CJEU ruled that, subject to certain conditions, the
employer was entitled to deduct the VAT it paid on services relating to
the administration of its employees’ pensions and management of the
assets of the pension fund set up to safeguard those pensions, where
the pension fund was a legally and fiscally separate entity.
The CJEU left it to the national court to determine whether those
conditions were met in the case of PPG.
You can read the full text of the decision on the CURIA
(Opens new window) website.
This Revenue and Customs Brief is aimed at:
- businesses and other taxable entities that provide pension
schemes for their employees
- pension fund management providers
- trustees of occupational pension funds
- tax advisers.
PPG, a Dutch company, established a defined benefit pension
scheme for its employees. PPG was required by law to establish a
pension fund, which had to be legally and financially separate from PPG.
PPG received supplies of pension administration and investment
management services from third parties, paid the cost of these services
and did not pass the costs on to the pension fund. PPG deducted the VAT
it paid on the administration and management fees as input tax. The
Dutch tax authorities challenged this position, PPG appealed and the
Dutch court referred two questions to the CJEU, which can be summarised
1. Can an employer deduct the VAT incurred by it on
administration and fund management services supplied to it in relation
to the operation of a separate pension fund established for the benefit
of its employees?
2. Can the defined benefit pension fund in question be
classified as a ‘special investment fund’ so that the management of the
fund was exempt from VAT?
1. The CJEU decided that an employer, like PPG, that has set
up a pension fund that is legally and financially separate can deduct
the VAT incurred on administration and pension fund management
services, provided that there is a direct and immediate link between
the services and the employer’s own supplies.
2. The CJEU did not answer the question concerning the
liability of the pension fund management services as this point had
already been addressed by the Court in the case of Wheels Common
Investment Fund Trustees and Others C-424/11.
1.3 HMRC Previous Policy
Until now, HMRC policy has been to distinguish between costs
incurred in relation to the:
- setting up and day to day administration of occupational
- management of the investment activities of the fund.
HMRC previously allowed employers to deduct VAT incurred in
relation to the general management (that is, administration) of an
occupational pension scheme on the basis that these costs are overheads
of the employer and thus have a direct and immediate link to their
In respect of investment management costs, HMRC considered
these costs to be of the pension fund itself and to relate solely to
the activities of the pension fund. To the extent that these inputs
were deductible, they were deductible by the fund and/or trustees of
Where a single invoice was received covering both the
administration of the pension fund and the management of the
investments in the fund, HMRC allowed the employer to claim 30% of the
VAT as relating to the general management of the scheme and the pension
fund to claim 70% as relating to the investment management.
1.4 Implementation of the Judgment
The CJEU has reiterated in PPG that, in order to deduct the
VAT incurred on a cost, a business must establish a direct and
immediate link between the supply received and the taxable supplies
that the business makes. Whether there is a direct and immediate link
will depend on whether the cost of the input services is incorporated
in the price of the supplies made by the business. A cost may either be
incorporated in the price of specific supplies or groups of supplies,
or be part of its general costs and incorporated in the price of all
the supplies made by the business. If a cost has a direct and immediate
link to specific supplies or groups of supplies, then it cannot also be
part of its general costs.
In respect of specific costs of investment management, these
will have a direct and immediate link to the supplies of the
investments themselves. For example, the costs of managing a property
within a pension fund will have a direct and immediate link to the
rental income derived from the property. They cannot therefore be
general costs of the employer. A similar analysis can be applied to the
financial investments. However, where the services received go further
than the management of the investments, they may be general costs.
Therefore, provided that the supply is received by the employer, the
VAT incurred will potentially be deductible by the employer.
As a result, HMRC is changing its policy on the recovery of
input tax in relation to the management of pension funds. This means
that there are circumstances where employers may be able to claim input
tax in relation to pension funds where they could not previously.
However HMRC will not accept that the VAT incurred in relation
to pension fund management/administration is deductible by an employer
in the following circumstances where the:
- supplies were not made to the employer (this includes, but
is not limited to, consideration of whether the employer has
commissioned and paid for the services)
- supply is limited to investment management services only
(that is, it is not a combined supply of both investment
management and pension administration services).
Additionally, where the employer receives the supply but the
pension fund bears the cost of the services (whether by way of
reimbursement or a set off against pension contributions), HMRC will
require an equivalent amount of output VAT in respect of the amounts
reimbursed to be accounted for. This amount is potentially deductible
by the pension fund to the extent that it is engaged in taxable
Where an employer is engaged in non-business activities or
makes exempt supplies, it will need to take these into account when
deducting any VAT incurred and restrict its deduction accordingly.
Further information on the treatment of non business activities can be
found at chapter 4.6 of Notice 700, The VAT Guide
and on partial exemption in Notice 706, Partial exemption.
Notice 700/17 Funded Pension Schemes will be updated shortly
to reflect these changes in VAT treatment.
Claims and Retrospective Action
From the date of this Brief, the policy outlined at 1.3 above
will no longer apply, except as specified in the transitional rules
below. The policy currently outlined in Notice 700/17 will be withdrawn
with immediate effect except in circumstances where the pension fund is
invoiced for services. In these circumstances, during a transitional
period of six months, to allow time for businesses to adapt in response
to this Brief, the pension fund and the employer may continue to agree
to a 70/30 split on the terms set out in that Notice.
HMRC do not intend to take any action to correct the position
in cases where the employer has deducted a proportion of the VAT under
the existing treatment (outlined at 1.3 above) and the criteria
outlined at 1.4 above were not met.
Businesses that provide pension schemes for their employees
and receive supplies of services that fall within the criteria outlined
at 1.4 above are entitled, but not obliged, to claim a refund of any
input VAT which has not previously been claimed. Where a business has
chosen to apply the 70/30 split, a claim for a refund would entail a
recalculation of the amounts of input tax proper to the employer and
the fund respectively.
Whilst the liability of management services in respect of
defined benefit pension schemes has now
been determined by the CJEU, a judgment on the liability of management
services in respect of defined contribution
pension schemes is expected soon from the CJEU in the case of ATP
Pension Service A/S C-464/12. The CJEU may decide that VAT should not
have been charged on such services. In such circumstances, HMRC will
take the appropriate steps to protect their position in relation to
input tax claimed for the management of defined contribution pension
schemes. This will include the issuing of assessments to recover any
VAT deducted that was incorrectly charged.
Notice VAT 700/45 How to correct VAT errors and make adjustments or
claims explains how to go about claiming a refund in this
Claims for under-declared input tax are subject to the normal
capping rules. Claims for repayment will therefore not be considered
for periods ending more than four years before the date on which the
claim is made.
Any claim made must set out the basis of the error and the
amount being claimed and show how that amount has been calculated. The
claim should also make it clear whether the claim is in relation to VAT
incurred in relation to a defined benefit or a defined contribution
pension scheme. The claimant must be able to provide copies of the
documentation used in the calculation of the claim on request. An
'estimated' claim, or a declared intention to lodge a claim at a future
date, will not stop the clock running on the four year cap.
All claims resulting from the
changes outlined in this Brief should be sent to:
by post to:
VAT Repayments Team S0483
PO Box 200
Businesses that have already made a claim will now have their claims
processed. However, they may wish to provide details of their claim to
the email address above to ensure claims are dealt with promptly.
About the Author
© Crown Copyright 2014.
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for educational / informational purposes only. Article reproduced by
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Article Published/Sorted/Amended on Scopulus 2014-02-04 13:33:17 in Tax Articles