On 7 March 2013, the Court of Justice of the European Union (“CJEU”) released its long-awaited decision in the “Wheels” case, which was about the VAT treatment of investment management services provided to defined benefit (“DB”) occupational pension schemes (and the common investment funds in which their assets are sometimes pooled).
It decided that investment management services supplied to DB schemes (and associated common investment funds) are not exempt from VAT.
It is estimated that DB schemes pay £100m in VAT on investment management services which they cannot recover. Had the CJEU ruled the other way, it could have triggered a repayment of up to £2bn in backdated claims.
In 2007, the CJEU decided that fund management services supplied to investment trusts are exempt from VAT. Following that decision, the supplier of fund management services to the Wheels Common Investment Fund and three associated DB schemes submitted a claim to HMRC for the repayment of VAT paid in respect of those services.
In favour of the claim, it was argued that those fund management services were exempt from VAT under UK rules, and under the terms of the EU VAT Directive which makes the “management of special investment funds as defined by member states” a VAT-exempt supply.
HMRC argued that DB schemes (and common investment funds in which assets are pooled) are not “special investment funds” for the purposes of the Directive. It said they are not open to the public, and that the amounts invested in DB schemes are “disconnected” from the amount of the contribution to the fund and the investment performance of the underlying assets.
The CJEU’s decision
The dispute found its way to the CJEU, which found in favour of HMRC. The CJEU did not accept that there was a close analogy between DB schemes (and associated common investment funds) and collective investment funds.
It had two main reasons for this. First, occupational pension schemes are not open to the public and are an “employment-related benefit which employers grant only to their employees”. Second, members of DB schemes “do not bear the risk arising from the management of the investment fund in which the scheme’s assets are pooled, unlike private investors in a collective investment undertaking”, and the members are therefore in quite a different position from investors in a collective investment undertaking.
Accordingly, the CJEU decided that DB schemes and associated common investment funds are not “special investment funds”, meaning that investment management services supplied to them are not exempt from VAT under the UK’s VAT rules.
What about money purchase pension schemes?
The CJEU’s decision expressly relates only to DB schemes. Does the same conclusion apply to investment management services provided to money purchase pension schemes?
We think it is too early to say. Occupational money purchase pension schemes are also not open to the public, so the first of the CJEU’s two grounds for distinguishing occupational pension schemes from other collective undertakings would apply to them too. But its second ground for distinguishing occupational pension schemes from other collective undertakings applies only to DB schemes: in a money purchase scheme, members do bear the risk arising from investment management, and the pensions provided do depend on the value of scheme assets and the performance of investments. Depending on which of these characteristics the CJEU thinks is the more decisive, it remains an open question whether EU law requires investment management services supplied to money purchase schemes to be VAT-exempt or not.
But we may not have too long to wait before we know the CJEU’s answer. It is also due to consider a Danish case, ATP PensionService A/S v Skatteministeriet, about the meaning of “special investment funds” in relation to a Danish pension fund. This is not a conventional money purchase scheme on the UK model, but it has many common features, and in particular the return to the employee depends on the yield realised by the pension fund’s investments. With luck the CJEU’s answer there will make it clear whether fund management services to money purchase schemes are or are not exempt from VAT – though of course it may reach its conclusion on the basis of some feature of the Danish scheme that UK schemes do not share. As a hundred headlines will point out, there are wheels within wheels.