They have been an annoyance to politicians and insurers of late, but a European court could now potentially hand some defined benefit (DB) pension schemes a £100m per year windfall

The figure relates to VAT contributions on investment management services that DB investment trusts have been bidding to recoup since a 2008 European Court of Justice (ECJ) ruling. It was declared then that as special investment funds, investment trusts should be exempted from VAT obligations on investment management services.

The Luxembourg-based court have now been instructed by a London tribunal to interpret whether this exemption applies to the Wheels Comment Investment Fund (WCIF), who have made a joint claim with the National Association of Pension Funds (NAPF) against HM Revenue & Customs.

An NAPF press release stated that all pension funds with segregated investments managed by asset managers stand to benefit from a positive ECJ ruling. Although it has not been established exactly how many funds this might amount to, HMRC claimed at the recent tribunal that there are "lots of schemes" awaiting the outcome.

NAPF Chief Executive Joanne Segars said: "This is an important case and there's a strong argument that defined benefit pension funds should be exempt from paying VAT on investment management services. A successful outcome would benefit pension scheme members by cutting running costs and boosting the funds available for investment."

Defined contribution (DC) schemes already usually qualify for VAT exemptions on investment management services via a clause on pooled funds, while public sector funds enjoy wide near-universal VAT exemptions.

A £100m per year tax reduction, estimated as an aggregate for all the schemes that might be able to apply for an exemption, would be a welcome gift to trustees at DB schemes facing the ongoing task of de-risking. A verdict is not expected from the ECJ until late 2012, however.

dbillingham@wilmington.co.uk

First published on 07.03.2011