HMRC will need to review its policy on the VAT-exempt status of the management of defined contribution pension schemes following the recent court decision in the ATP case.
“The ATP case is important,” says Moore Stephens VAT expert Robert Facer. “It is the latest in a series of rulings that have broadened the scope of the VAT exemption on the management of funds. HMRC had dismissed the idea that pension schemes might be affected, but now we finally have a case that challenges this stance.”
The decision by the Court of Justice of the European Union (CJEU) focused on whether the management of a defined contribution (DC) scheme is VAT_exempt. In the UK, the basic position (excluding insurance based schemes) is that the management of DC schemes is VATable.
“The key point in the CJEU’s decision was whether a DC pension scheme is sufficiently comparable to other kinds of ‘special investment fund’ where the management is already allowed to be exempt,” Robert says. “If a DC scheme is sufficiently comparable, under the VAT principle of fiscal neutrality, the management of it must also be exempt.”
The ATP case originated in Denmark and the Danish courts had queried whether certain factors were relevant in determining the comparability of DC schemes with other types of investment fund. For example, does the fact that pension contributions may be deductible for income tax purposes have an impact? Similarly, what about the fact that the employer pays contributions into the pension scheme rather than the individual concerned?
The CJEU has brushed these aside as having no relevance to the comparability issue. Instead, the court identified three requirements that would indicate the sufficient comparability of a DC scheme:
• the pension scheme must be funded by the employee (it doesn’t matter if the physical payment is made by the employer);
• the scheme works on the principle of spreading investment risk;
• the employee ultimately bears the investment risk, i.e. if the stock market crashes, the employees receives a lower pension payout (distinguishing it from a defined benefit scheme).
“The court concluded that if these conditions were met, then a DC scheme was sufficiently close to other types of schemes in which an individual might invest,” Robert says. “Therefore, the management of such DC schemes must also be covered by the exemption in order not to breach fiscal neutrality.”
What does this mean for the UK? “There is always a possibility that HMRC may identify some distinguishing factor that could negate the ruling’s application in the UK,” Robert cautions. “However, it seems likely that HMRC will have to review the scope of the exemption as currently applied in the UK.”
Many schemes that currently pay VAT on their management fees have already filed protective claims with HMRC. “Now that we have the European court’s judgment, those businesses should be pursuing those claims,” Robert says. “Where a claim has not yet been made but a DC scheme manager has been charging VAT, the manager and the fund should urgently consider the position, bearing in mind that there is a four year time limit for VAT claims.”
ContactsUK VAT team