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HMRC Responds To Recent CJEU Decisions In Pension Fund Management Cases
Tuesday 30th December 2014
HMRC has recently released two Briefs on the tax treatment of pension fund management costs and services following CJEU decisions in Fiscale Eenheid PPG Holdings BV [C-26/12)(PPG) and ATP Pension Services (C-464/12)(ATP).
In Brief 43, HMRC explains that PPG received supplies of services relating to the administration of the pensions and investment management of the assets of the pension fund from third parties on which VAT was charged. It paid the cost of these services itself and did not pass the costs on to the pension fund.
The CJEU decided that PPG was entitled to deduct the VAT incurred by it in such circumstances, provided that there was a direct and immediate link between the services and its own taxable supplies.
HMRC’s policy had been to distinguish between costs incurred in relation to the:
- setting up and day to day administration of occupational pension schemes
- investment management relating to the assets of occupational pension schemes
HMRC had previously allowed employers to deduct VAT incurred in relation to the administration of an occupational pension scheme on the basis that these costs were overheads of the employer and thus had a direct and immediate link to the employer’s business activities.
In respect of investment management costs, HMRC considered these costs to relate solely to the activities of the pension scheme. To the extent that these inputs were deductible, they were deductible by the scheme.
In some cases a single invoice was received covering both the administration of the pension scheme and the management of the investments. In such circumstances HMRC allowed the employer to claim 30% of the VAT as relating to the administration of the scheme and the pension scheme to claim 70% as relating to the investment management as an administrative simplification.
As a result of the PPG judgment, HMRC is changing its policy on the recovery of input tax in relation to the management of pension schemes. This means that there are circumstances where employers may be able to claim input tax in relation to pension schemes where they could not do so previously.
HMRC now accepts that there are no grounds to differentiate between the administration of a pension scheme and the management of its assets, and there is no longer a need for any administrative simplification to deal with supplies involving both elements. In each case the employer will potentially be able to deduct input tax if it receives the supply of services.
In Brief 44, HMRC sets out its position following the decision of the CJEU in a Danish case concerning VAT and pension fund management services, ATP Pension Services (C-464/12) (ATP). The CJEU found that a pension fund which pooled investments from a number of defined contribution occupational pension schemes qualified as a Special Investment Fund (SIF) for the purposes of the VAT exemption for fund management services.
Prior to the CJEU’s judgment 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 VAT exemption for fund management services.
HMRC now accepts that pension funds that have all of the following characteristics are SIFs for the purposes of the fund management exemption so that the services of managing and administering those funds should be, and always should have been, exempt from VAT:
- they are solely funded (whether directly or indirectly) by persons to whom the retirement benefit is to be paid (ie the pension customers)
- the pension customers bear the investment risk
- the fund contains the pooled contributions of several pension customers
- the risk borne by the pension customers is spread over a range of securities
HMRC will now also accept that funds that contain the pooled assets of personal pension schemes and that have all of the above characteristics will also fall within the VAT exemption for fund management services.
A personal pension fund will not pool assets if an individual investor exercises an option to give directions as to how their contributions are invested (eg in specific assets and/or funds external to the pension fund) that overrides the investment powers of the trustee/pension provider. HMRC does, however, accept that exemption could still apply to the fund where the costs of managing the assets of those investors who give such directions (ie the non-pooled assets) can be easily identified and excluded from exemption.
In respect of pension schemes that pay members’ contributions into a number of different funds, exemption will only apply to services supplied in connection with funds that possess the characteristics outlined above. Where the contributions of a number of schemes are paid into a single fund, it will be necessary to consider whether that fund as a whole possesses all the characteristics set out above. Both such arrangements may be found in respect of hybrid pension schemes but will also apply in other circumstances.
Where investment management or administration services are supplied to a scheme that has a number of funds, some that posses the characteristics of a SIF and others that do not, to determine the correct VAT treatment of the services in question it will be necessary to apply the rules on single/multiple supplies.Contact Us