European Union: To Be (Recoverable) Or Not To Be (Recoverable), VAT Is The Question

Last Updated: 23 September 2013
Article by Marcus Kealey

In our April bulletin we looked at the European Court of Justice ("ECJ") ruling in the Wheels 1 case, in which VAT paid on investment management fees by the trustees of a UK defined benefit pension scheme was held to be irrecoverable. The ECJ has since given another judgment in this important area, in the case of PPG Holdings . 2


Dutch law required PPG to set up pension arrangements for the employees of its subsidiaries, by the establishment of a legally and financially separate entity (i.e. a pension scheme) from which those retirement benefits would be paid. PPG and its subsidiaries paid contributions into the scheme on behalf of their employees, but employees were not required to make their own contributions. 

One of PPG's subsidiaries subsequently entered into contracts with a Netherlands-based provider of administrative and asset management services in relation to the scheme. PPG's subsidiary paid for the services in full; no costs were recharged to the scheme. When PPG's subsidiary attempted to recover the VAT it had paid on the services received by the scheme, it met resistance from the local Dutch tax inspector. After an initial complaint and subsequent hearings conducted in various Dutch courts, the issue was referred to the ECJ.

Referral to the ECJ

The principal question asked of the ECJ was whether a taxable entity, which was legally required to establish a separate pension scheme under national legislation, could recover the VAT it had paid on the services provided to that scheme. In arguing that investment-related VAT was irrecoverable, the Dutch tax inspector made two submissions:

  • PPG as the employer could not be regarded as the recipient of the services which the scheme had received and, for the cost of which, the scheme had not reimbursed PPG's subsidiary; and
  • (on the basis of Wheels), pension funds were not classed as "special investment funds" for the purposes of the VAT exemption within the relevant Council Directive, and therefore the VAT was irrecoverable.

The ECJ confirmed that the purpose of the VAT deduction system was to "relieve the operator entirely of the burden of the VAT paid or payable in the course of ... his economic activities". However, to qualify for a deduction of VAT:

  • either there had to exist a direct and immediate link between the particular transaction on which VAT had been charged (here, the receiving of investment advice) and the particular transaction(s) undertaken as a consequence (the marketing and selling by PPG of its products);
  • or, if there was no such direct and immediate link between particular transactions, the costs of the services in question had to form part of the taxable person's general costs, and therefore constitute a component part of the price of the goods or services that the taxable person supplied.

Decision of the ECJ

As to whether the Dutch tax inspector's second submission was correct, the ECJ declined to comment: provided that VAT was deemed recoverable under the VAT deduction system (which in this case it was), there was no need in the Court's eyes to revisit the Wheels judgment.

So VAT can now be reclaimed on investment costs incurred by pension schemes? 

Not necessarily: there is far more to this than meets the eye! 

A fundamental part of the Court's reasoning hinged on the fact that, under Dutch law, an obligation exists to make pension arrangements for employees. 

In addition the VAT here was payable by the sponsor (which also paid for the actual investment management advice that the scheme received), whereas in the UK many pension schemes meet such costs themselves. 

It is also uncommon in the UK nowadays for pension provision to be made on a non-contributory basis (i.e. with the employer paying all contributions, as PPG did). 

And simply from a practical perspective, we anticipate that HMRC will strongly resist any attempts by UK pension schemes to recover VAT paid on investment-related services. For so long as legal uncertainty exists and it is possible to argue that investment-related VAT is not recoverable, we envisage that HMRC will do so. 

Equally, given the sums at stake to many large pension funds (and with auto-enrolment likely to impact on the profit margins of many smaller employers who had not previously been obliged to make pension provision for their staff), we do not think this will be the last that is heard of this matter...


1 Wheels Common Investment Fund Trustees Ltd and others v. Commissioners for HMRC, Case C-424/11
2  Fiscal eenheid PPG Holdings BV v. Inspecteur van de Belastingdienst, Case C-26/12 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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