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VAT on common investment funds’ management fees not recoverable

VAT on common investment funds’ management fees not recoverable

The European Court of Justice (ECJ) recently ruled that VAT on investment management fees paid by the trustees of a UK defined benefit pension scheme is irrecoverable under a VAT exemption for special investment contained in two EU Directives.[1]

Wheels Common Investment Fund Trustees Ltd (Wheels Trustees) acts as trustee for various defined benefit occupational pension schemes established by the Ford Motor Company. Following the ECJ’s 2007 decision in Claverhouse,[2] Wheels Trustees’ investment manager sought to recover VAT paid by Wheels Trustees charged on investment management services it had provided to Wheels Trustees. The investment manager claimed that the services it had provided to Wheels Trustees fell within a VAT exemption set out in two EU Directives (originally Sixth Council Directive 77/388/EEC and currently Council Directive 2006/112/EC). The VAT exemption contained in both Directives was to the effect that Member States were to exempt from VAT “the management of special investment funds as defined by Member States”.

On the fund manager’s appeal, the UK First-tier Tribunal (Tax Chamber) referred various questions to the ECJ. The Tribunal’s questions focussed on whether and in what circumstances assets of defined benefit pension schemes and the investment funds in which they are pooled could be said to constitute “special investment funds” for the purposes of the two EU Directives.

ECJ decision

The ECJ concluded on 7 March 2013 that “special investment funds” amounted to undertakings established for the purpose of collective investment of funds in transferable securities out of capital invested by the public. Examples of collective investment funds would include authorised unit trusts and open-ended investment companies. However, the ECJ indicated that other entities could also satisfy the definition provided they had identical features, carried out similar transactions and were open to members of the public, or were sufficiently similar (and therefore in competition with each other).

The ECJ distinguished retirement pension schemes from collective investment funds on the basis that retirement benefit schemes were not open to the public but were instead restricted to employees of a particular employer. Further, a retirement benefit scheme was not sufficiently comparable with collective investment undertakings so as to be in competition with them. For example:

  • In contrast to members of the public invested in a collective investment undertaking, members of the defined benefits retirement pension scheme did not bear the risk arising from management of the investment fund. Under the rules of the defined benefit schemes, a member’s ultimate benefit was not linked to the value of the scheme’s assets or their underlying performance but was pre-determined by reference to a member’s length of service and salary.
  • A retirement pension scheme also differed to a collective investment undertaking from the employer’s perspective: The employer’s position was not analogous to an investor in a collective investment undertaking because, although the employer bore the financial risk in the underlying investments, the contributions which the employer paid into the scheme were made by the employer to discharge its legal obligations towards its employees.

For the above reasons, the ECJ concluded that a retirement pension scheme did not constitute a “special investment fund” for the purposes of the VAT exemption.

The decision has been met with disappointment across the UK pensions industry and has attracted criticism. Commentators have argued that drawing a distinction based on public access between unit trusts and pension schemes is tenuous: Many of those able to invest in unit trusts would probably also be able to invest in a pension scheme through their employer. Equally, the NAPF has reasoned that pension schemes are vehicles designed to be exempt from tax, therefore paying VAT amounts to a form of indirect taxation.

On a brighter note, the decision may not apply to defined contribution schemes where the risk of poor investment returns in the fund directly impacts scheme members albeit such schemes are not open to the public. It is understood that the application of the VAT exemption in relation to defined contribution arrangements will be considered in the Danish ATP case[3] scheduled to be heard by the ECJ in 2014.

Query, whether pension scheme trustees may be able to rely on a separate line of argument from Wheels namely an argument (based on fiscal neutrality) that investment management services should be VAT exempt whether provided by an insurer (exempt services) or non- insurer. This point is likely to be litigated over the next few years – so all is not necessarily lost. Please contact us if you would like further details.

Marcus Kealey

[1] The ECJ decision in Wheels Common Investment Fund Trustees Ltd and others v Commissioners for HMRC [2013] Case C-424/11 is available at http://lgl.kn/797a9.

[2] JP Morgan Fleming Claverhouse Investment Trust and The Association of Investment Trust Companies [2007] ECR I- 5517.

[3] ATP PensionService A/S v Skatteministeriet (Case C-464/12).


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