VAT and occupational pension funds
|JOHN MCGLONE examines a recent ruling from the Court of Justice of the European Union (“CJEU”) on whether the management of occupational pension funds should be treated as exempt from VAT.|
|The CJEU has delivered its judgment in the case of Wheels Common Investment Fund (Case C-424/11). The Court was asked to decide whether the VAT exemption which applies to the management of collective investment funds, should also apply to the management of defined benefit (“DB”) occupational pension schemes.‘
What is the case about?
VAT exemption applies to management services provided to certain types of special investment funds (known in Ireland as ‘qualifying’ funds). The Wheels case concerned the VAT treatment of management services provided to a DB occupational pension scheme, which had been established for the benefit of Ford employees in the UK. The UK National Association of Pension Funds also joined the case as an appellant in support of the Wheels position.
Wheels argued that DB pension schemes should be regarded as equivalent to, or sufficiently similar to, other funds which have already been recognised by the CJEU as ‘qualifying’ funds in the context of VAT exemption. Wheels also argued that DB schemes should be treated as being in competition with qualifying funds, and that the VAT principle of “fiscal neutrality” required that the same VAT treatment should be applied to both.
What did the court decide?
The ECJ held that DB pension schemes are not ‘qualifying’ funds in VAT terms and therefore that the supply of management services to such schemes should not be exempt from VAT.
The starting point, according to the Court, was that VAT exemption should only apply in the case of funds which (a) come within the terms of the UCITS Directive or display characteristics which are identical to UCITS or (b) are sufficiently comparable with UCITS so as to be considered in competition with them.
In relation to (a), the Court held that DB schemes cannot be regarded as identical to UCITS because they are not open to investment by the public.
As to whether DB schemes were sufficiently comparable with UCITS so as to be considered in competition with them, the Court found that they were not, for a number of reasons. Firstly, unlike the case with UCITS, the members of the DB scheme did not bear the investment risk (pension benefits were effectively underwritten by the employer). Secondly, the “return” for the employee’s investment in the scheme did not depend on the value of the scheme’s assets (because pension benefits were based on the employee’s final salary).
Also, the Court held that even though the employer bears investment risk, the employer is not in a situation comparable to an investor in a UCITS because the employer’s contributions arise as consequence of a legal obligation to the employee (that obligation being the employer agreement to contribute sufficient funds to cover the cost of the defined benefit), rather than in the course of an investment activity.
Impact of the case in Ireland?
DB pension schemes have generally not been treated as “qualifying” funds by investment managers providing services to such schemes. The Court’s ruling has confirmed this treatment and therefore, from the point of view of DB schemes, there will be no reduction to the cost of such services. If the case been decided the other way, fund managers would have had to deal with irrecoverable VAT on their cost inputs (a consequence of providing VAT exempt services) but this will not now be the case.
The impact for defined contribution (“DC”) schemes is less clear and the Court will be asked to consider DC schemes in a separate case to be heard later this year. Although DC schemes are not open to investment by the public (so the first of the CJEU’s grounds for ruling in the Wheels case would equally apply to DC schemes), there is perhaps a better case to be made for DC schemes in the context of the second part of the Court’s ruling.
In a DC scheme, members bear the investment risk, and the benefits received depend on the value/performance of the investments. It remains to be seen whether the Court will consider that DC schemes are sufficiently comparable with a UCITS fund so as to be regarded as in competition, and therefore whether investment management services supplied to DC schemes should be treated as VAT exempt on those grounds.
It should be noted that VAT exemption currently applies (under Irish domestic VAT law) to the management of a Unit Trust established solely for the purposes of a superannuation fund scheme. Unless domestic Irish VAT law is changed, VAT exemption should continue to be available to such arrangements.
It is also important to note that the Wheels case does not impact on the VAT exemption available for the management of certain collective investment undertakings which are already regarded as ‘qualifying’ funds under Irish VAT domestic legislation (including many regulated funds, S.110 securitisation vehicles and certain approved self-directed life assurance bonds).
Two other cases concerning pension schemes and VAT have been referred to the CJEU. PPG Holdings (C-26/12) concerns the entitlement of employers to recover VAT on fees incurred in connection with the set up and operation of an employee pension fund. Separately, as noted above, a Danish case has been referred to the CJEU (ATP Pension Services (C-464/12)). This case considers fund management services provided to a pension scheme which has characteristics of a defined contribution (“DC”) pension scheme. These cases are likely to be decided later in the year.
John McGlone is a tax partner at KPMG.