In its latest policy brief, published on 5 October, HMRC has clarified the application of the exemption from VAT where a regulated insurance company provides fund management services to a special investment fund (SIF). As a result, where defined benefit schemes use such management services, the charges they incur from insurance companies will no longer be exempt from VAT with effect from 1 January 2018.
The issue of VAT exemption for pension scheme management charges has been under review and discussion for several years. Recent Court of Justice of the European Union (CJEU) cases has added some clarification in respect of money purchase pension schemes that satisfy the criteria (typically diversified pooled investments) for treatment as a special investment fund (SIF).
In ATP Pension Services which considered the position of money purchase schemes, the CJEU found that a pension fund which pooled investments from a number of defined contribution occupational pension schemes qualified as a SIF for the purposes of the VAT exemption for fund management services.
Prior to the judgement in ATP, HMRC did not consider pension funds of any kind to be SIFs, and therefore treated services provided in connection with all types of pension fund as falling outside the specific VAT exemption for the management of SIFs. HMRC has now accepted that pension funds that have all of the required characteristics of SIFs for the purposes of the fund management exemption are, and always have been, exempt from VAT. Pension funds that don’t have all those characteristics aren’t SIFs and so aren’t within the scope of the exemption.
It has now been confirmed that no further cases on the matter will be heard before the UK leaves the European Union. Therefore, from 1 January 2018 the policy of allowing insurers to treat their supplies of non-SIF pension fund management services as VAT exempt insurance is to be discontinued.
Whilst defined benefit schemes do not usually use SIFs, where any do they will no longer be able to claim the VAT exemption for management services provided by insurance companies from the beginning of next year.