Out-Law News 2 min. read

Pension fund management services provided by non-insurers subject to VAT under EU law, court says


Pension fund management services provided by non-insurers do not fall within the exemption in the VAT Directive for insurance transactions, the UK High Court has decided in a case concerning the trustees of the pension fund for United Biscuits, the snack food manufacturer.

The trustees were seeking to recover from HM Revenue & Customs (HMRC) VAT they had paid for pension fund management to investment managers who were not insurers. The trustees argued that the supplies of management services by the non-insurers were insurance transactions for the purposes of the EU VAT Directive and therefore should have been exempted by UK law. HMRC argued that investment services did not constitute insurance business as there was no element of risk.

Until 1 January 2005, UK VAT legislation treated pension fund management services provided by insurers as exempt from VAT, but those provided by non-insurers as standard rated. From that date UK legislation was changed so that pension fund management services were standard rated, regardless of whether they were supplied by insurers or non-insurers. However, HMRC continued to apply its previous policy of exempting services provided by insurers.

In October, shortly before the United Biscuits case was heard by the High Court, HMRC published a Revenue & Customs Brief announcing that it was withdrawing its policy of allowing exemption for pension fund management services provided by insurers with effect from 1 January 2108. It later announced that the commencement date would be postponed to "sometime later in 2018 or in the first half of 2019".

"The arguments over the VAT status of management services provided to pension funds have been going on for years. United Biscuits tried a different track to the Wheels and ATP litigation, but HMRC has responded by withdrawing the concessionary treatment for fund management services provided by insurers. HMRC and the Treasury are the only winners and it is likely that pensioners and savers will ultimately lose out," said Maryse Heijnen, a VAT expert at Pinsent Masons, the law firm behind Out-Law.com.

In the United Biscuits case, Mr Justice Warren considered the meaning of insurance in the First Life EU Directive. He said that if management of group pension funds "were insurance as ordinarily understood, it is at least curious that it was not included within Article 1(1) of the First life Directive".

"The explanation for that is as follows," he said. "This activity, on its own, was not to attract mandatory regulation of the service provider as an insurer: a provider who did not provide life insurance as ordinarily understood or the other services specified in Article 1(1) did not require regulation. But an insurer which, in addition to its main insurance business, wished to provide a service of managing group pension funds, was to be entitled to do so and that activity would fall to be regulated along with its main business. The clear inference, it seems to me, is that the activity of management of pensions funds did not, of itself, amount to insurance." 

He said that the management of group pension funds was not a VAT- exempt activity, whether carried out by insurers or non-insurers. However, he said that the trustees could not rely on the principle of fiscal neutrality in order to obtain exemption on supplies by non-insurers, which were standard rated under UK law, on the basis that similar supplies by insurers were exempt under UK law.

"If a member state wrongly affords exemption to one supplier, as a matter of domestic law or practice, another supplier cannot invoke the principle of fiscal neutrality to obtain the same treatment," Mr Justice Warren said. 

The judge said that even if the services should have been exempt, the trustees should have claimed the VAT back from the non-insurers, rather than from HMRC, which is in line with the recent judgment of the Supreme Court in ITC. The non-insurers would in turn have a claim against HMRC – subject to the four year time limit. He said it would not be "impossible or excessively difficult" for the trustees to obtain reimbursement from the non-insurers.

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