Partner Article

DC pensions – the VAT man’s not for robbin’!

A senior European lawyer has indicated that Defined Contribution occupational pension funds (DC) should not incur VAT on fees for managing its funds.

Assuming the European Court of Justice follows this ‘Opinion’, the UK will have to recognise that a DC fund is a special investment fund, and that services provided by fund managers should be exempt from VAT.

Investment managers are paid an investment management fee for managing the funds, and generally pass on transaction costs when assets are bought and sold. As these costs are usually taken directly out of the funds’ assets, any VAT saving on costs will invariably benefit the value of the funds’ assets.

In coming to his conclusion, the Advocate General considers that if a DC is comparable to a UCITS (Undertakings For The Collective Investment Of Transferable Securities) then it is, by definition, a special investment fund (SIF) that can benefit from VAT exemption.

According to the Advocate General, the relevant criteria for comparison to a UCITS fund are (1) does the pension scheme pool the funds of several investors and (2) does the investor bear both the costs of operation of the fund and the investment risk?

If these criteria are satisfied, then a DC will consequently qualify as a SIF for the purpose of the VAT exemption.

In contrast, if, similar to defined benefit pension schemes, the costs and the risks are not shared then one must assume VAT exemption would not apply and management fees would, and should, remain subject to VAT.

These are interesting times for the pension sector as there are already challenges that employers should be able to recover VAT incurred on employee pension funds’ costs.

As it is estimated that by 2018 up to nine million workers will be automatically enrolled into a DC workplace pension scheme by their employer, any VAT exemption (or VAT recovery by the employer) can only enhance a fund’s assets.

This was posted in Bdaily's Members' News section by Baker Tilly .