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Advocate General Pikamäe has opined that pension fund management services do not fall within the insurance VAT exemption, regardless of whether they are supplied by insurers or non-insurers.

If his Opinion is followed by the CJEU, that would mean there is no current scope for VAT exemption for the management of defined benefit pension schemes.

The CJEU judgment is expected in the second half of 2020, before the case is returned to the Court of Appeal.

Background

The case concerns the VAT liability of services comprising the discretionary management of the assets of:

(i) a defined benefit (“DB”) pension scheme; and

(ii) an investment fund in which the DB scheme had invested.

The investment managers supplying the services did not provide any coverage or indemnification against any risks (e.g. the risk of poor investment performance or capital losses).

The United Biscuits pension scheme (“UB”) had originally paid VAT on the management services supplied by investment managers who were not insurers (“non-insurers”).

UB sought to challenge this, arguing that such services should be treated as VAT-exempt, in the same way that HMRC had accepted that insurers could treat their pension fund management services as exempt during the periods in question.

Reference to CJEU

The case came before the Court of Appeal in February 2019, which referred the following question to the CJEU.

Are supplies of pension fund management services as are provided to the Trustees by (a) Insurers and/or (b) Non-insurers “insurance transactions” within the meaning of Article 135(1)(a) of the VAT Directive?

Key Points from Opinion

Not an “insurance transaction”

· There is no definition of an “insurance transaction” in the Principal VAT Directive.

· However, the key components can be identified from CJEU case-law. There needs to be a contractual relationship between insurance provider and insured, which includes:

(a) a risk to be covered;

(b) the payment of a premium to cover that risk; and

(c) the insurer’s liability to provide something (whether cash, goods or services) in the event the risk arises.

· On the facts of the case, there was no assumption of risk by the investment managers – and hence the investment management services did not meet the criteria to be an “insurance transaction”.

Interaction with Insurance Directives; Fiscal Neutrality

· Even though the “management of group pension funds” might be referred to in the Insurance Directives as a class of long-term insurance, the AG noted that the objective of those directives was to specify the classes of activity subject to compulsory authorisation. The inclusion does not mean that pension fund management represents an “insurance activity” for VAT purposes.

· Equally, it makes no difference whether the supplier has regulatory authority to conduct insurance business.

· The fact that HMRC erroneously allowed insurers to treat their supplies of pension fund management as VAT exempt for many years does not bring the same supplies by non-insurers within the scope of the exemption.

Next Steps

The next step is for the CJEU to issue its judgment, which we expect in the second half of 2020.

If the CJEU follows the AG’s Opinion, this would mean that the investment management services supplied to UB did not fall within the VAT exemption for insurance transactions.

It would also mean that (following Wheels) there is no current basis in EU law for applying VAT exemption to the management of DB schemes or their assets.

Claims relating to these proceedings should be maintained until the case reaches its final determination.

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