EUROPE – The National Association of Pension Funds (NAPF) and the Wheels Common Investment Fund (WCIF) have lost their case against UK HM Revenue & Customs (HMRC) in which they argue that pension funds should be exempt from paying VAT.

In a decision taken today, the Court of Justice of the European Union (CJEU) ruled that UK workplace defined benefit (DB) pension funds are not special investment funds and therefore not exempt from paying VAT on investment management services.

The lawsuit was filed in 2008 following a ruling by the CJEU on the JP Morgan Fleming Claverhouse Investment Trust.

At the time, the court stated that investment trusts were special funds and should be exempt from paying VAT on investment management services.

Following the judgement, the NAPF and the WCIF, which manages Ford Motor Company's pensions, brought a similar case to a UK court of justice, arguing that pension funds have similar characteristics and therefore should enjoy a similar exemption.

A tribunal hearing held in London in February 2011 referred the case to the CJEU.

Today, the European court rejected the claim, which means pension funds will continue to pay VAT taxes and be unable to make backdated claims to 1990.

For Joanne Segars, chief executive at the NAPF, the judgement was "deeply disappointing".

"Pension funds were set up to be vehicles that are free from tax, and they should not be paying these VAT charges," she said.

"The European Commission is currently reviewing the VAT Directive, and we will be making strong representations as to why the management of pension funds should be VAT exempt under the proposed change to the current VAT regime."

A number of pension experts have called on Brussels to clarify what is considered a 'special investment fund'.

Julie Patterson, director of authorised funds and tax at the Investment Management Association (IMA), said: "Costly and lengthy legal cases are not in anyone's interests.

"A clearer definition of exactly where VAT should and should not apply in this area is needed in EU law."

Lorraine Parkin, head of indirect tax at advisory firm Grant Thornton UK largely agreed.

She argued that the service of fund management with respect to other collective investment vehicles, such as unit trusts, benefitted from VAT exemption.

"However, the CJEU has clearly stated in this judgment that an occupational scheme is, in fact, not open to the public, but constitutes an employment-related benefit that employers grant only to their employees," Parkin said.

According to her, a "significant" amount of money is riding on this judgment.

"Had the judgment been that occupational schemes were to be regarded as special investment funds, it may have been possible for schemes to have claimed substantial sums, via the fund managers, to recoup the VAT previously charged by them," she said.  

"This ruling from the CJEU means this will no longer be possible, which is no doubt a blow to many funds, but probably has HM Treasury breathing a sigh of relief."

Reacting to the decision made by the European court today, HMRC said it is pleased that the judgement supports their current policy on the application of the investment fund management VAT exemption.