The National Association of Pension Funds (NAPF) has teamed up with a private pension scheme that manages the retirement savings of Ford, Jaguar and Land Rover workers to bring a £300 million legal challenge against the Government’s policy of charging VAT on investment management fees.

The NAPF claims HM Revenue and Customs is breaking European tax law by imposing VAT on the management fees paid by certain types of occupational pension schemes.

It has joined forces with the Wheels Common Investment Fund (WCIF), which manages £8 billion in assets, to tackle the taxman in court.

If its challenge is successful, the NAPF said UK pension schemes will save around £100 million a year in VAT on management fees. Claims for historical VAT rebates could swell that figure to £400 million, it said.

The NAPF and WCIF are suing the Revenue in the UK tax courts although given the sums involved, the case is likely to be referred to the European Court of Justice (ECJ).

The NAPF’s challenge follows a successful claim by the investment trust industry last year in which JP Morgan Claverhouse persuaded the ECJ that it and similar collective investment schemes should be exempt from VAT.

Joanne Segars, chief executive at the NAPF, said: “After last year’s ECJ judgement, there is a strong case that defined benefit occupational pension funds should be exempt from paying VAT on investment management services.”

The NAPF said that a successful challenge would benefit members of defined benefit pension schemes. Since they are structured differently, most defined contribution schemes are already exempt from paying VAT on management fees.

Andrew Loan, a tax partner at Macfarlanes, the City law firm, said that the Revenue was likely to put up stiff opposition to the NAPF claim and warned that if it was referred to Europe it could be three years before the issue is resolved.

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