VAT is a topical issue for pension schemes, in part due to a rising tide of European court decisions. The latest intervention from the Court of Justice of the European Union (CJEU) is its decision in Case C-464/12, ATP PensionService, which may have important implications for employers with defined contribution occupational pension schemes.
In the Wheels case (C-424/11) last year the CJEU rejected arguments that funds held by a UK common investment fund, and its underlying defined benefit pension schemes, were “special investment funds” within the meaning of the EU VAT Directive. Being special investment funds would make investment management of the funds exempt from VAT altogether.
The question for the Court in the ATP case was whether the Danish defined contribution scheme in question could, by contrast, be regarded as a special investment fund.
The Court held that it could, distinguishing Wheels. A DC pension arrangement should be regarded as a special investment fund “if the funds are invested using a risk-spreading principle, and if the pension customers bear the investment risk.” The fact that contributions are made by the employer does not change this. Nor does the fact that the accumulated funds could be paid out, either as a lump sum or in instalments, after pensionable age. The Court also rejected the Danish Government’s argument that if contributions to a pension fund were deductible from income tax, that prevented the pension fund’s activities from being exempt from VAT.
The ATP decision may also require further review of the VAT treatment of services currently regarded as “general management” rather than “investment management” as distinguished by HMRC in the Revenue & Customs Brief 06/14 following the recent PPG case (see our Law Now here). Some services historically treated as taxable may be properly exempted so that there is a reduced cost to employers, especially those who do not fully recover input VAT.
The case will not have a direct impact on the many DC schemes in relation to which VAT is not payable on investment management services because they invest through insurance wrappers. These are covered by a different VAT exemption. Pooled funds based in other jurisdictions may also benefit from reduced VAT leakage already. However, the decision will be relevant for DC schemes with segregated investments managed through asset managers. Employers with such schemes may wish to consider with their advisers whether VAT reclaims should be sought bearing in mind that there could be knock-on consequences for managers who may have to repay input tax previously recovered. Such employers should also review the recovery of taxable charges for “general management” following PPG. They may well find that restructuring contractual arrangements going forward can assist in maximising VAT efficiencies for all parties following these recent cases.