According to the ruling recently handed down by the ECJ in Wheels Common Investment Fund Trustees Ltd and others v Commissioners for Her Majesty’s Revenue & Customs, a common investment fund in which the assets of several defined benefit (“DB”) pension schemes are pooled for investment purposes cannot claim exemption from VAT on third-party management fees.
Under Article 13B (d) (6) of the Sixth VAT Directive (77/388/EEC) and its successor Article 135(1) (g) of Council Directive 2006/112/EC (together the “VAT Articles”), an exemption from VAT applies to "the management of special investment funds as defined by Member States". A 2007 ECH decision (the “Claverhouse decision”) operated to exempt from VAT, closed-ended collective investment undertakings such as investment trust companies.
Wheels Common Investment Fund Trustees Limited (“WCIF”) pooled the assets of several DB pension schemes and fund management services were provided to WCIF by Capital International Ltd (“Capital”), which levied VAT on these services.
Following the Claverhouse decision, Capital sought to have the VAT paid on the services it provided to WCIF, over a defined period, refunded.
In February 2011, the First-tier Tribunal (Tax Chamber), which was hearing the case, referred several questions regarding the correct interpretation of the VAT exemption to the ECJ.
The ECJ was asked whether the words "special investment fund" in the VAT Articles were capable of including a DB scheme established by an employer for the benefit of its employees and/or a common investment fund in which the assets of several such schemes are pooled for investment purposes.
The ECJ ruled that a common investment fund does not constitute a "special investment fund" under the VAT Articles. The ECJ distinguished a common investment fund and DB scheme from other funds on the following grounds:
- Unlike other funds, such as UCITS, which would qualify as “special investment funds” under the VAT Articles, a DB scheme is not open to investment by the general public. A DB scheme is instead an employment-related benefit available for employees of the sponsoring employer.
- A common investment fund could not be considered as sufficiently comparable to a collective investment undertaking that would qualify as a “special investment fund” under the VAT Articles. In particular, because the members of a DB scheme do not bear the risk arising from the management of the fund in which the scheme’s assets are pooled.