VAT and pension funds: withdrawal of VAT exemption for fund management services provided by insurers

Out-Law Legal Update | 17 Oct 2017 | 2:20 pm | 3 min. read

SPEED READ: Whether management services provided to pension funds are taxable or exempt for VAT purposes has been in dispute for around 10 years. The CJEU has considered the issue but United Biscuits has launched a challenge in the UK courts on the basis that HMRC adopts a different treatment for funds managed by insurers.  HMRC has responded by announcing the withdrawal of its long established policy of allowing exemption for pension fund management services provided by insurers. This will mean the addition of VAT to previously exempt management, increasing costs for many pension funds. In addition, a significant VAT change must be implemented within three months.

The battle between the UK's HM Revenue & Customs (HMRC) and pension funds over whether management services provided to pension funds are taxable or exempt for VAT purposes has been raging for around 10 years now. We thought we had the answers courtesy of the Court of Justice of the European Union (CJEU): taxable in the case of defined benefit schemes (the Wheels case) and exempt in the case of defined contribution schemes (the ATP case). The answer was disappointing for defined benefit (DB) schemes and the trustees of the United Biscuits pension scheme decided to launch a further challenge.

The further challenge took a differing approach to the Wheels litigation. Instead of focussing on the nature of the pension vehicle and whether or not it was a Special Investment Fund (SIF), United Biscuits focussed on the nature of the services. They and their advisers pointed to the apparent disparity allowed by HMRC for many years. Pension fund management services provided by insurers have benefited from exemption as supplies of insurance, irrespective of whether or not the vehicle being managed was a SIF. United Biscuits makes various claims, and in particular asserts that the doctrine of fiscal neutrality requires that essentially similar services are taxed in the same manner. Thus, runs their argument, fund management services supplied by non-insurers should benefit from exemption in the same manner as those supplied by insurers. It is not the first time this disparity has been pointed out. In fact HMRC (or HM Customs & Excise as was) consulted on the disparity following the 2001 Myners report into long-term savings. The results of the consultation did not support alteration of the status quo and so matters remained as we currently find them.

Matters between HMRC and United Biscuits have been proceeding through the preliminary case management stages at the High Court. However, on 5th October the impact of the case was thrust into the public domain. With no consultation or discussion HMRC published Revenue & Customs Brief 3 (2017). The contents of the brief are not particularly surprising; in fact it may be fair to say they are highly predictable. Despite the lack of surprise the impact is likely to be profound.

With effect from 1st January 2018, HMRC will withdraw its long established policy of allowing exemption for pension fund management services provided by insurers. The brief claims that this is final recognition of the position set out by the CJEU in its 2005 judgment in Card Protection Plan and the consequent severing of the link between an insurer’s regulatory status and the VAT liability of its supplies.

It clearly serves HMRC’s purpose to withdraw the exemption and also assert that the exemption had no basis in law. By so doing, to some extent, it 'de-fangs' United Biscuits’ neutrality argument. Presumably the position must be that as there was no legal basis for the policy of allowing exemption in this manner, then there should be no neutrality argument as there is not, and never has been, a comparable genuinely exempt service at law.

It remains to be seen whether this tactic will deliver victory for HMRC at the High Court in the United Biscuits case. It may be that the Supreme Court’s earlier judgment in Investment Trust Companies has already fatally wounded United Biscuits before battle commences. What seems clear though, is that should United Biscuits prevail, then its victory is likely to be hollow and confined to a retrospective period. Further, the price of victory is the loss of the on-going insurance exemption for numerous large pension funds. At a time of meagre investment returns and large-scale pension scheme deficits, the addition of VAT to previously exempt management charges is likely to be viewed as a very unwelcome development by pension schemes and, more importantly, savers and pensioners.

In the clash of arms during litigation, it seems that the parties may have, inadvertently, conspired to effectively scorch the earth over which they fight. The timing of the announcement by HMRC is difficult in the extreme. The investment industry, already dealing with large-scale regulatory and economic change, must now implement a significant VAT change within three months.  The pension schemes must deal with an additional twenty per cent increment to a significant cost base element. HMRC state that most insurers provided management services to defined contribution schemes that, since ATP, benefit from exemption as SIFs. The fund industry seems less certain of this position.

So there we have it. A possible narrow, confined, victory at the almost certain loss of a key strategic exemption. When the dust of battle finally clears the only certainty is that pensioners and savers will almost certainly pay the price.

Stuart Walsh is a tax expert at Pinsent Masons, the law firm behind Out-law.com.