Advocate General: pension investment management services not VAT exempt

The trustees of the occupational scheme of biscuit manufacturer United Biscuits had tried to recover from HM Revenue & Customs (HMRC) the VAT which they paid on fees to investment fund managers for managing an occupational pension scheme.

The Court of Appeal referred to the Court of Justice of the European Union (CJEU) the question of whether investment management services supplied to an occupational pension scheme may be classified as an ‘insurance transaction’ and therefore as exempt from VAT.

Advocate general Priit Pikamäe said in his opinion that the insurance exemption from VAT did not apply because pension fund management services do not entail the assumption of any risk by the investment managers.

He said that according to case law of the CJEU "every insurance transaction includes the following elements: a risk, a premium and the provision of a guarantee in the event of the materialisation of the risk".

The advocate general said it was clear from the case law that 'insurance transactions’ must be understood in a strict sense as the exemption does not refer generally to 'transactions in the insurance business' or 'the management of insurance policies'. 

Insurance transactions necessarily imply the existence of a contractual relationship between the provider of the insurance service and the insured, he said.

In contrast, pension investment management services consist in the management of the financial assets held by the pension scheme trustees, the advocate general said.

"Such asset management does not in itself entail the assumption of a risk, but constitutes a distinct service necessary for the proper functioning of the pension fund managed by the applicants. Furthermore, it is apparent from the order for reference that the applicants in the main proceedings do not have any contractual insurance relationship with the beneficiaries of the pension fund," he said.

"Although there are legal relations between the trustees and the investment managers that may certainly be important for the performance of transactions for the occupational pension schemes, the activities carried out by the trustees are not in themselves exempt insurance transactions," the advocate general said.

Whether management services provided to pension funds are taxable or exempt for VAT purposes has been in dispute for more than 10 years. The CJEU decided in previous cases that defined contribution pension funds, but not defined benefit pension funds, could benefit from a VAT exemption for the management of special investment funds.  

At the time that the United Biscuits trustees claimed VAT recovery, HMRC accepted that pension fund management services provided by insurers fell within the insurance exemption, but those provided by others did not. This meant that pension fund management services provided by insurers were exempt even if the pension scheme was a defined benefit scheme and so did not qualify as a special investment fund. The United Biscuits trustees launched a challenge in the UK courts arguing on the basis of 'fiscal neutrality' that it was wrong for HMRC to adopt a different treatment for funds managed by insurers.

HMRC responded to the United Biscuits challenge by announcing in 2017 that it would withdraw from 2018 its long established policy of allowing exemption for pension fund management services provided by insurers. The withdrawal was postponed and eventually applied from April 2019.

“The advocate general’s opinion continues the direction of travel for the United Biscuits litigation," said Stuart Walsh, a VAT disputes expert at Pinsent Masons, the law firm behind Out-Law. "In 2019, HMRC withdrew its long established policy of allowing exemption for pension fund management services provided by insurers, asserting that it had no basis in law. That move significantly undermined United Biscuits’ argument that fiscal neutrality required the same type of services provided by non-insurers to benefit from the exemption. The advocate general certainly thinks so." 

"Having established that the pension fund management services are not insurance transactions, the advocate general concluded that fiscal neutrality would be breached if services that do not meet the strict criteria could benefit from the exemption. It is difficult to see the full court taking a different view,” Walsh said.

Advocate generals are legal advisers of the CJEU. 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.

The United Biscuits trustees also argued that as under EU insurance directives such as The First Non-life Directive and the First Life Assurance Directive, the provision of pension fund management is regarded as 'insurance related' or as an 'insurance operation', the services should be treated as exempt insurance transactions under the VAT Directive.

The advocate general said that having regard to the different objectives pursued by the insurance directives and by the VAT Directive the scope of the concepts set out in those directives is different.

"There is nothing to justify extending the [VAT] exemption to ancillary services which are regulated by reference to and in conjunction with insurance services," the Advocate General said.