On 28 June 2007, the European Court of Justice (ECJ) ruled on the VAT treatment of management services to UK investment trusts.

Background

Prior to 2007, UK VAT legislation limited the scope of an exemption from VAT to the management of:

  • an authorised unit trust scheme (AUT) or of a trust based scheme; and
  • the scheme property of an open-ended investment company (OEIC).

The management of other types of investment vehicles (including investment trust companies (ITCs)) was subject to VAT.

This meant that when a fund manager charged an AUT or an OEIC for its services it did not charge VAT. However, when a fund manager supplied similar services to an ITC, VAT had to be charged.

The case

Claverhouse (an ITC) challenged the validity of this aspect of UK VAT legislation. In the 10 years ending on 31 December 2003, it had paid £2.7 million in non-recoverable VAT on management services.

The CJEU concluded that, as special investment funds, investment trusts should be exempt from paying VAT on investment management services. However, HMRC did not automatically extend the effect of the Claverhouse ruling from investment trusts to pension trusts, being of the view that workplace pension schemes did not come within the exemption and should therefore continue paying tax.  A test case was therefore needed to ascertain the effect (if any) of the ruling on pension schemes.

Test case

In May 2008, Wheels Common Investment Fund (WCIF) and the NAPF agreed that they would jointly bring a legal challenge against HMRC on the application of VAT on the investment management services supplied to occupational pension funds. WCIF is an £8 billion multi-employer scheme covering Ford Motor Company Limited, Jaguar Cars Limited and Land Rover.

In February 2011, a VAT Tribunal hearing decided that the ECJ should interpret the scope and meaning of the exemption and decide if it should be extended to pension schemes.

  • The CJEU heard the case on 12 September 2012, with the EC siding with HMRC. Among other things, they argued that in most cases, it is the employer that is the beneficiary of investment performance in a DB scheme and as such there was no need to extend the VAT exemption.
  • The CJEU held in a decision published on 7 March 2013, that DB pension schemes and common investment funds cannot benefit from the VAT exemption available to other funds that constitute “special investment funds”, as they can be distinguished on a number of grounds.

Key factors in reaching these conclusions were that, unlike private investors in a collective investment fund, in a workplace DB pension scheme:

  • members do not bear the risk arising from the management of the investment fund in which the scheme’s assets are pooled;
  • members’ pensions do not depend on the value of the scheme’s assets and the performance made by the scheme’s fund managers; and
  • even though the employer must bear the financial consequences of the investments made by the pension scheme’s fund managers, its position is not comparable to that of an investor in a collective investment fund because contributions are made to the scheme as a means of complying with the employer’s legal obligations towards its employees.