Management of investments, portfolios, funds, ‘wrapper’ products and related services: exemption for the management of ‘special investment funds’: Pension Funds
Defined Benefit Pension Schemes
In 2013, the scope of the UK exemption for the management of special investment funds (SIFs) was again considered by the CJEU in the case of *Wheels Common Investment Fund Trustees and others *C424-11 (‘Wheels’). In this case, the CJEU held that defined benefit occupational pension schemes are not SIFs for the purposes of Article 135(1) (g) of the Principal VAT Directive. The Court decided, in line with HMRC’s policy in this area, that:
- Defined benefit pension schemes are not collective investment undertakings within the meaning of the UCITS Directive because they are not open to investment from the public.
- Furthermore, members of these schemes (i.e. employees) do not bear the risks arising from the performance of the assets invested in them but rather benefits are defined by reference to salary and length of service on retirement.
- Employers, who do bear some risk, pay into these schemes to comply with legal obligations towards their employees so cannot be compared to investors in collective investment undertakings.
- Such schemes do not, therefore, compete with qualifying funds and cannot be SIFs for the purposes of the VAT exemption.
Consequently, the CJEU confirmed that supplies of investment management services to defined benefit pension schemes were standard-rated for VAT purposes.
Defined Contribution Pension Schemes
In ATP Pension Services “ATP” (C-464/12), the CJEU considered whether a defined contribution occupational pension fund could be a special investment fund (SIF) and decided that it could on the basis that, unlike in a defined benefit pension scheme, the employees’ pension benefits are determined by the performance of the assets invested in the pension fund and it is therefore the employee, rather than the employer, that bears the investment risk.
In light of the ATP judgment, it is now accepted that pension funds that have all of the following characteristics are SIFs for the purposes of the fund management exemption so that the services of managing and administering those funds are exempt from VAT:
- they are solely funded (whether directly or indirectly, e.g. by an employer) by persons to whom the retirement benefit is to be paid (i.e. the pension customers)
- the pension customers bear the investment risk
- the fund contains the pooled contributions of several pension customers
- the risk borne by the pension customers is spread over a range of investments
In addition to funds that contain the pooled assets of defined contribution occupational pension schemes, such as that at issue in ATP, funds that contain the pooled assets of personal pension schemes and that have all of the above characteristics will also fall within the VAT exemption for fund management services.
A pension fund will not pool assets if individual investors exercise an option to give directions as to how their contributions are invested (e.g. in specific assets and/or funds external to the pension fund) that overrides the investment powers of the trustee/pension provider. Such an arrangement is commonly found in Self-Invested Personal Pensions Schemes (SIPPS) where, even if the scheme has more than one member, the assets are ring-fenced to the individual members and invested in line with their own personal investment strategy.
This does not apply, however, where schemes hold assets within a number of different funds and each of those funds adopts a different investment strategy (e.g. high/low-risk, ethical investments etc.) and investors have the option to decide which of these funds they would like to invest in (including whether/when to move assets between those funds) but have no control over how their contributions are invested within the funds themselves.
Mixed/multiple funds and hybrid pension schemes
Where pension schemes pay members’ contributions into a number of different funds, exemption will only apply to services supplied in connection with funds that possess the characteristics outlined above. Where the contributions of a number of schemes are paid into a single fund, it will be necessary to consider whether that fund as a whole possesses all of the characteristics set out above.
If a supplier is providing services to a hybrid scheme, i.e. a scheme which provides both DB and DC benefits, then exemption will apply if those services are supplied in respect of the qualifying funds/assets only. Where the supplier is making a single supply of services in respect of a hybrid scheme as a whole, then the criteria for exemption will not be met and the services will be subject to VAT.