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Landmark UK VAT Change On Pension Fund Management Services

by Jason Gorringe,, London

06 October 2017

HM Revenue and Customs has confirmed that it will repeal the exemption from VAT provided to all pension fund management services provided by regulated insurance companies from January 1, 2018, long after the European Court of Justice's ruling in Card Protection Plan.

In Revenue and Customs Brief 3 (2017), released on October 5, 2017, HMRC explained that the exemption is the result of the UK's original application of the insurance exemption to all of an insurer's regulated insurance activities, including the management of pension funds.

Following the ECJ judgment in Card Protection Plan (CPP), UK law was amended from January 1, 2005, to remove any link between an insurer's regulatory status and the entitlement to VAT exemption on its supplies. The judgment in CPP makes it clear that the EU insurance exemption applies only to the underwriting of risk and doesn't apply to other supplies made by insurers.

However, UK policy continued to allow insurers to exempt their supplies of pension fund management services. The initial retention of this policy followed from an earlier HMRC consultation entitled "Consultation on the VAT Treatment of Pension Fund Management," which was published in November 2002. The responses to this consultation were inconclusive, and, as a result, the then government announced that it wouldn't make any immediate changes to the VAT treatment of fund management services, but would keep the issue under review.

Since then, this treatment has been reviewed regularly and maintained, reflecting the ongoing uncertainty concerning the current and future treatment of pension fund management services. Initially this uncertainty arose from the EU Commission's review of the VAT treatment of financial services, which began in 2006, and which created an expectation that it would result in a future exemption for all pension fund management services. However, after several years of discussion, the EU Commission withdrew its proposal in its 2016 Work Programme, as no agreement appeared likely. Continuing ECJ litigation in this area has created further uncertainty, HMRC said.

In ATP Pension Services (C-464/12) (ATP), the ECJ found that a pension fund that pooled investments from a number of defined contribution occupational pension schemes qualified as a special investment fund (SIF) for the purposes of the VAT exemption for fund management services.

This case specifically concerned defined contribution (otherwise known as money purchase) pensions and didn't concern the VAT treatment of services supplied in connection with defined benefit pensions. Services supplied in connection with defined benefit pensions schemes were found by the ECJ in Wheels Common Investment Fund Trustees and Others (C-424/11) to fall outside the fund management exemption on the basis that the investment fund (which pools the assets of such a scheme) wasn't a SIF.

Prior to the judgment in ATP, HMRC didn't consider pension funds of any kind to be SIFs, and therefore treated services provided in connection with all types of pension fund as falling outside the specific VAT exemption for the management of SIFs. In light of the ATP judgment, HMRC now accepts that pension funds that have all of the required characteristics are SIFs for the purposes of the fund management exemption, so that the services of managing and administering those funds are, and always have been, exempt from VAT. Pension funds that don't have all those characteristics aren't SIFs and so aren't within the scope of the exemption.

Turning to discuss HMRC policy, Revenue and Customs Brief 3 (2017) announced that, now the relevant court cases on this issue have now concluded, and it is now clear that there will be no further review of the EU rules in this area before the UK exits the EU, it is appropriate that HMRC now updates its policy to reflect the settled case law. Consequently, the policy of allowing insurers to treat their supplies of non-SIF pension fund management services as VAT exempt insurance is to be discontinued.

HMRC said, however, that it acknowledges that the great majority of pension fund management services provided by insurers are supplied for defined contribution pension funds and therefore qualify (and have always qualified) for exemption as SIFs following the judgment in ATP.

TAGS: court | compliance | VAT rates | tax | investment | pensions | value added tax (VAT) | law | financial services | insurance | United Kingdom | services | VAT goods & services classification | VAT case law | VAT compliance matters | Investment | Europe | Work | Invest | Other | Investment

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