In a judgment handed down in the High Court in United Biscuits (Pension Trustees) Ltd and another v HMRC  on November 30, 2017, it was decided that pension fund management services from service providers other than insurers are not exempt from VAT. This is the latest in a series of cases relating to possible exemption from VAT of management and investment services provided to pension schemes.
The United Biscuits Pension Fund (UBPF) was a DB occupational pension scheme for employees of United Biscuits (UK) Ltd. UB Pension Investment Fund (UBPIF) was a collective investment fund in which the assets of UBPF were invested from 1989 to 2006.
The trustees of UBPF and UBPIF, who were the claimants in the case, received pension fund management services from various investment managers, comprising both companies that were authorised to conduct insurance business in the UK (insurers) and companies that were not so authorised but which provided pension fund management services (non-insurers). All of the contracts between the claimants and the investment managers provided for the payment by the claimants of fees plus VAT on those fees “if applicable”. Thus, the claimants paid VAT, in addition to the fees, to the non-insurers.
The claimants considered that the services provided by the non-insurers should, in fact, have been exempt and sought from HMRC recovery of the VAT paid. HMRC disputed the claim on the ground that the supplies by the non-insurers were not exempt from VAT and the claimants brought a claim for recovery of the disputed amounts in the High Court.
The Court dismissed the claimants' action, holding that the services provided by the non-insurers were not exempt from VAT, as the provision of pension fund management services did not comprise “insurance” for the purposes of the relevant EU VAT law, and therefore the VAT exemption did not apply to the provision of such services (whether by insurers or non-insurers).
The Court rejected the claimants' arguments that management of pension funds attracted VAT exemption on the basis that this was “insurance” within the meaning of “direct insurance” under the relevant Directive.
There have been several cases in recent years concerning the VAT treatment of various services provided to pension schemes. In Wheels Common Investment Fund Trustees Ltd and others v HMRC, the ECJ ruled that a DB scheme would not generally be regarded as a special investment fund (SIF) and thus third-party investment management fees would not attract VAT exemption under EU law. This litigation provided a life-line in Wheels in that the First-tier Tribunal allowed an application by the taxpayers to amend the existing grounds of appeal to include arguments (advanced in this case) that the principle of fiscal neutrality required similar supplies to be treated in the same way, irrespective of whether those supplies were made by an insurer or a non-insurer.
The decision in United Biscuits has now rejected the notion that because HMRC has incorrectly allowed insurers to exempt pension fund management services supplied by them in the past, such supplies by non-insurers should also attract exemption on the grounds of fiscal neutrality.
HMRC has now reconsidered its practice of treating pension fund management services as insurance, and has now announced that it will be withdrawing its policy of allowing insurers to apply VAT exemption to supplies of pension fund management services made to pension funds without SIF status.
Although the Court stated that the exemption should not be applied to pension fund management services supplied by insurers, it seems unlikely that HMRC will revoke the postponement of the extension of the withdrawal date to April 1, 2019, although this is unconfirmed.
In future, it must be correct that fiscal neutrality requires supplies of pension fund management services by insurers and non-insurers to attract the same VAT treatment. Given the decision in Wheels, it seems inevitable that this should be taxation rather than exemption. This will no doubt be unwelcome to insurers, but non-insurers are likely to see it as levelling the playing field. As for trustees, they may take some comfort from the fact that they have enjoyed exemption on pension fund management services supplied by insurers for longer than they may have expected.
There is no indication yet whether the decision in United Biscuits will be appealed, but given the sums involved such an appeal would be unsurprising.