The recent decision of the CJEU, effectively denying the VAT exemption on investment management services to UK workplace defined benefit (DB) pension funds, is a setback to pension schemes, who were hoping to assuage their VAT burdens.
I. VAT and pension schemes — where are we now?
This article is intended to summarise the effect of recent legal developments on the VAT costs incurred by pension funds, and to look to what might happen in the near future.
Most of the case law is in the European Court of Justice (“CJEU”), and the developments are being closely followed in a number of countries, especially the Netherlands, Ireland and Denmark, as well as in the UK.
II. Investment vehicle or insurance product?
In broad terms, a pension fund would be some form of aggregation of shares, securities and other investments invested to provide benefits in retirement. These “funds” take many forms — in the UK, occupational pension schemes are usually structured as a trust.
Costs are incurred, such as expenses towards administration and investment management. The key question for such an investment vehicle is to what extent these costs are exempt from VAT and, if to the extent they are subject to VAT, whether it can be recovered by the fund as input tax.
Many pension schemes provide for scheme administration and fund management to be carried out by permitted insurers under a contract, so such services are exempt from VAT as part of the provision of insurance within Article 135(1)(a) of Council Directive 2006/112/EC (the “Principal VAT Directive” or “PVD”).
The wide scope of this exemption for investment management and administration of pensions in an insurance “wrapper” means that most of the issues dealt with in the rest of this article are not of a concern to such schemes.
In the case of Winterthur Life UK Limited v. HMRC (VAT Decision 17,572), which concerned a Self-Invested Personal Pension (“SIPP”) product, HMRC considered that the service provided in relation to that part of the scheme that involved self-selection of investments by the policyholder was taxable. However, even in such a structure, the UK VAT and Duties Tribunal held that the appellant was at all times providing an exempt service as an insurance agent acting in an intermediary capacity.
III. Investment vehicle — does it have an economic activity?
A fund vehicle can only recover VAT on its overheads if it is registered for VAT as a “taxable person”, which it can only do if it has an “economic activity”. The mere holding and selling of investments is not an economic activity. However, the CJEU has held that the management of collective investment in transferable securities using capital raised from the public is an activity that “goes beyond the compass of the simple acquisition and the mere sale of securities and which aims to produce income on a continuing basis, constitutes an economic activity within the meaning of Article 4(2) of the Sixth Directive.” — (Banque Bruxelles Lambert SA Case C-8/03).
By analogy, it should be the case that the investment activity of a pension fund could constitute an economic activity, and this is HMRC’s current policy, despite the decision in Wellcome Trust limited (Case C-155/94). However, the VAT on its overheads can only be recovered to the extent it is attributable to the making of taxable supplies (or supplies outside the scope of VAT but with credit for input tax). Since a major part of the activity is likely to involve the exempt sale of shares and securities, the recovery of VAT from such activities of a pension fund is likely to be low……