CJEU ruling challenges HMRC stance on pension tax exemptions
HMRC will need to review its policy on the VAT status of the management of defined contribution pension schemes following the recent European court decision.
“The ATP case is important as 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 VAT-able.
“The key point in the CJEU’s decision was whether a DC pension scheme is sufficiently comparable to other kinds of & lsquo;special investment fund’ where the management is already allowed to be exempt. If a DC scheme is sufficiently comparable, under the VAT principle of fiscal neutrality, the management of it must also be exempt.”
“The court concluded that if certain conditions were met, then a DC scheme was sufficiently close to other types of schemes in which an individual might invest. 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. However, it seems likely that HMRC will have to review the scope of the exemption as currently applied in the UK.
“Now that we have the European court’s judgment, schemes that currently pay VAT on their management fees and have already filed protective claims with HMRC should be pursuing those claims. 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 4 year time limit for VAT claims.”
Background on the ATP Case
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 court identified the following three key requirements:
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 receive a lower pension payout (distinguishing it from a defined benefit scheme).