Out-Law News 2 min. read
13 Dec 2013, 4:41 pm
VAT expert Darren Mellor-Clark of Pinsent Masons, the law firm behind Out-Law.com, said that the opinion of Advocate General Cruz Villalón appeared to be good news for pension schemes in many EU member states. Many DC pension schemes in the UK already benefit from insurance-related VAT exemptions, but additional implications of the opinion would likely become apparent once it was published in English, he said.
"There were a number of secondary questions referred to the Court relating to whether the supply of management services was a single or multiple supplies; and if it could be split whether exemption would be found for its component parts," he said. "This may have more impact in the UK market, and we will offer fuller comment on reading the English language version of the opinion."
"However, this is a very positive decision for pension schemes in many EU member states, which should now consider ensuring that claims for overpaid VAT are submitted and are up to date if they have not already done so," he said.
Advocate Generals are legal advisers of the Court of Justice of the European Union (CJEU), the EU's highest court. Their opinions are not binding on the CJEU, however judges use the opinions in making their decisions and they are followed in the majority of cases.
Earlier this year, the CJEU found that defined benefit (DB) pension schemes could not be classed as special investment funds and therefore take advantage of the VAT exemption. This was because there were "a number of characteristics" that set these schemes apart from the 'collective investment undertakings' the exemption was intended for; in particular the fact that they were not open to the public and that members did not bear the risk arising from the management of the scheme's funds, it said.
Mellor-Clark said that the indications were that the Advocate General's opinion in relation to DC schemes had hinged on who bore the risk of the funds under management in the scheme losing value. In a typical DC scheme, the value of the benefit received on retirement depends on the performance of the member's investment, and it is the member who bears the full risk of that investment not performing well. That being the case, a DC pension scheme could be seen as comparable to a UCITS (Undertakings for Collective Investment in Transferrable Securities) fund, because this type of fund also pools assets and spreads risk between members.
However, the Advocate General qualified his opinion by clearly stating that it was the identity of the party that bore the risk that was key to whether the scheme could be classed as a 'special investment fund', and so benefit from the exemption, Mellor-Clark said. The identity of the party making contributions to the scheme was irrelevant. This meant that it made no difference if, in the case of an occupational DC scheme, it was the employer rather than the employee who made contributions or payments to the scheme provided that it was ultimately the employee who bore the investment risk.
EU VAT rules exempt "the management of special investment funds as defined by member states" from the tax. In 2008, the CJEU ruled that investment trusts should be included within this definition.