CJEU decision could allow greater scope for VAT exemption on DC pension fund administration services, says expert

Ruling in a case involving Danish pension provider ATP PensionService A/S, the Court of Justice of the European Union (CJEU) said that DC schemes had the same essential characteristics of other investment vehicles included within the scope of the exemption. Unlike the members of defined benefit (DB) pension schemes, where members do not bear the risk of the funds under management not performing as well as expected, members of DC pension schemes bear the risk arising from the way the scheme's funds are managed, it said.

Financial services VAT expert Darren Mellor-Clark of Pinsent Masons, the law firm behind Out-Law.com, said that most DC schemes in the UK already benefited from VAT exemption as they were formed through insurance contracts. However, the case could be of wider interest in relation to the VAT liability of various administration-type services supplied on an outsourced basis to DC schemes, he said.

"If DC schemes are to be treated as special investment funds, then this decision may allow greater scope for VAT exemption to be applied to such services," he said. "Schemes and their suppliers would be well advised to consider whether the VAT treatment of such services has changed following the decision."

"Most DC schemes in the UK are formed via insurance contracts and so already benefit from VAT exemption. For the smaller number of trust-based DC schemes, this represents a real opportunity to reclaim VAT erroneously paid to managers," he said.

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. Last year, in a case involving a UK-based pension scheme, the CJEU found that DB pension schemes could not fall within the exemption as the fact that they were not open to the public, and that members did not bear the risks arising from the management of the scheme's funds, set them apart from the types of funds that the exemption was intended to benefit.

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. According to the CJEU, this means that a DC pension scheme in which the members bear the risk in this way can 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.

"The essential characteristic of a special investment fund is the pooling of assets of several beneficiaries, enabling the risk borne by those beneficiaries to be spread over a range of securities," the CJEU said in its ruling. "The schemes at issue in the case before the referring court are funded by the persons to whom the retirement benefit is to be paid and those persons bear the investment risk."

The court added that the fact that contributions were paid into the scheme on behalf of members by their employers, based on an amount negotiated with trade unions, was irrelevant. This did not alter "the fact that the contribution is paid by the worker (or at least in his name and on his behalf), that he will benefit from the proceeds of his investments and that he also bears any risks in that connection", it said in its judgment.

The CJEU went on to consider the scope of the exemption, which it said was intended to "facilitate investment in securities through investment undertakings". The underlying VAT rules did not in principle "preclude the management of special investment funds from being broken down into a number of separate services ... even where they are provided by a third-party manager", it said.

"Services such as computing the amount of income and the price of units or shares, the valuation of assets, accounting, the preparation of statements for the distribution of income, the provision of information and documentation for periodic accounts and for tax, statistical and VAT returns, and the preparation of income forecasts are covered by the concept of 'management' of a special investment fund," it said. "That term also covers accounting services and account information services."

It was up to the Danish court to decide whether each of the services provided by ATP in the underlying case could properly be interpreted as "management" services, it added.

Mellor-Clark said that the CJEU did not provide any further comment on management of occupational DB schemes as part of its judgment. "Therefore it is almost beyond doubt that the CJEU's decision in the Wheels case of last year stands and that DB schemes do not qualify for exemption on this basis," he said.

"Managers with appeals stood behind the ATP case will now need to consider how to proceed. Given the continuing complexity in this area it would be prudent to do so with the benefit of advice," he said.