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VAT exemption on investment management fees for DC schemes

22 April 2014

ECJ Judgment - ATP PensionService A/S V Skatteministeriet The VAT exemption

A recent European Court of Justice (ECJ) decision means that occupational Defined Contribution (DC) schemes can claim exemption from VAT on their third-party administration expenses (click here to read the case in full).

The ECJ has recently upheld the Opinion of the Advocate General in ATP PensionService A/S v Skatteministeriet, (C-464/12), which stated that an occupational DC scheme can constitute a "Special Investment Fund" if certain conditions are met. As such, an occupational DC scheme can therefore claim an exemption from VAT on its third-party administration expenses.

This exemption only applies to DC schemes because the investment risk on the collective investment is borne by the employee, which means DC schemes are sufficiently similar to Undertakings for Collective Investment in Transferable Securities (UCITS) funds and "Special Investment Funds" (SIFs) to receive similar tax treatment.

When does a DC scheme count as a "Special Investment Fund"?

According to the judgment of the Advocate General, an occupational pension scheme will count as an SIF where the scheme:

  • pools the assets of several beneficiaries, with the beneficiaries bearing the investment risk, and
  • allows the spreading of risk over a range of securities.

So this covers UK DC occupational pension schemes.

Which particular services are VAT exempt?

Helpfully, the ECJ lists which specific services can be VAT exempt, such as opening contributor/member accounts and operating the payments into the member account, as well as accounting services and account information services. This guidance is not exhaustive, however, and other services can also be exempt from VAT.

We await HMRC response to this judgment, particularly as this decision follows HMRC Brief 06/14 dated 3 February 2014 about HMRC's change in policy on the recovery of VAT incurred by employers relating to pension schemes (see our update about this here).

Action to take

Pension schemes should confirm with their investment managers that VAT claims have been made to HMRC for the past 4 years to ensure they have protected their position. Going forward, they should look to reclaiming their VAT. Whether you can successfully make a claim will depend on how your investment management services are set up, and whether the investment costs are separate or bundled with other services.

Changes to invoicing arrangements, and perhaps to the underlying contracts, may be needed to ensure the requirement that the supply is made to the employer is met. We can assist with assessing the potential for repayment claims, which will be considered by HMRC for periods up to four years before the date on which the claim is made.

For more information, please contact Michael Jones on +44 (0)20 7203 8917 or michael.jones@crsblaw.com