AG opines that pension fund management is not exempt insurance

The Advocate General (AG) has opined that pension fund management services provided to the trustees of the United Biscuits pension fund cannot be exempted under the exemption for insurance services or due to the operation of the principle of fiscal neutrality: United Biscuits (Pension Trustees) Ltd v HMRC Case 235/19 (AG, 14 May 2020).

The Opinion is the latest in a long running series of cases dealing with the VAT treatment of pension fund management. On this occasion, the AG concluded that there was no basis for treating pension fund management as an insurance transaction for VAT purposes (despite its appearance in certain insurance directives) and that the fact that historically HMRC (incorrectly) allowed pension fund management by insurers to be treated as exempt did not provide a basis for treating similar supplies by non-insurers on the same basis.

Background: VAT and the management of defined benefit pension schemes

Questions relating to VAT and investment management have a long history. In 2008, the trustees of the Wheels Common Investment Fund instigated proceedings before the First-tier Tax Tribunal (FTT), seeking to recover VAT that had been accounted to HMRC on supplies of investment management services to defined benefit (DB) pension schemes. Article 135(1)(g) of the Principal VAT Directive (PVD) exempts from VAT transactions that comprise the management of special investment funds (SIFs). The Wheels claims were made on the basis that defined benefit pension funds either were SIFs, or were sufficiently similar to funds that qualified as SIFs that the Community law principle of fiscal neutrality required them to be treated as such for VAT purposes. In March 2013, the Court of Justice of the European Communities confirmed that DB pension schemes do not qualify as SIFs and nor does the principal of fiscal neutrality require them to be treated as such - the funds are not open to the public in general and the members of the schemes do not bear the risks associated with the investments.

However, it had long been HMRC’s policy to treat supplies of pension fund management by insurers as falling within the insurance exemption contained in Article 135(1)(a) of the PVD. This lead to a second case on the correct VAT treatment of pension fund management brought by the Trustees of the United Biscuits Pension Fund, who argued that supplies of such management should be treated as exempt whether provided by insurers or non-insurers alike. Subsequently, Wheels were granted permission to amend their case to align themselves with the arguments being put forward in the United Biscuits case, see Wheels keep turning.

It should also be noted that HMRC later announced that they would no longer treat supplies of pension fund management by insurers as an exempt supply of insurance with effect from 1 April 2019. See Withdrawal of VAT insurance exemption for pension fund management provided by insurers.

The United Biscuits case

United Biscuits Pension Trustees sought restitution from HMRC of amounts paid by way of VAT to suppliers of investment management services to their DB pension funds. Unlike in the ‎Wheels proceedings, the United Biscuits Pension Trustees sought recovery directly from HMRC.

The United Biscuits claims were also made on a different basis to that in Wheels, namely that of the insurance exemption. The claims argued that:

• the fund management services were exempt from VAT as supplies of
  insurance (within the exemption contained in Article 135(1)(a) of the
  PVD) or by virtue of the principal of fiscal neutrality; and

• it was either impossible or excessively difficult for the claimants
  to recover the sums from the suppliers, with the result that the
  claimants had a direct right to recover the amounts of the mistaken
  payments from HMRC.

The High Court rejected these claims. See Supplies of pension fund management not exempt insurance. However, the Court of Appeal referred questions to the ECJ, which the AG has now considered.

Opinion of the AG

The AG first considered whether the supply of investment fund management to a pension fell within the definition of an insurance transaction for the purposes of Article 135(1)(a) of the PVD. This argument was founded on the basis that the scope of the VAT exemption for insurance must be aligned with the scope of insurance in the wider European insurance directives. In particular, the United Biscuits Pension Trustees pointed out that the First Life Directive included management of group pension funds within the meaning of direct insurance. In contrast, HMRC argued that it was clear from the VAT cases involving application of the insurance exemption that insurance required the assumption of risk, something that was entirely absent from the management of pension funds. HMRC also raised a technical argument that Article 1 of the First Life Directive differentiated between "kinds of insurance" and "other operations", with pension fund management falling within the latter category.

The AG noted that the fundamental features of an insurance transaction were that “the insured protects himself against the risk of financial loss, which is uncertain but potentially significant, by means of a premium payment of which is certain but limited”. Clearly the investment fund management in this case fell outside that concept. As regards the inclusion of management of group pension funds in the First Life Directive, the AG essentially agreed with HMRC’s technical point. There was a difference between insurance and “other operations” and investment management only fell into the latter category.

Finally, the AG concluded that, taking into account the purpose of the exemption for insurance and reinsurance, there was no reason for the services received by the trustees in this case to fall within the exemption. They “do not seem to be either to be performed within the framework of an insurance contract or to give rise to an amount corresponding to an insurance premium”.

As regards the fiscal neutrality argument, the AG noted that this was largely based on “the fact that for more than 40 years the United Kingdom exempted supplies of fund management services when they were made by insurers”. On this argument, the AG simply concluded (without any great analysis) that “the fact that the United Kingdom granted the exemption to those services according to the status of the taxable person, although the services in question did not meet the criteria relating to the interpretation of Article 135(1)(a) cannot constitute an argument for changing those criteria of EU law. It follows that what is alleged to be unequal treatment cannot bring non-insurance activities within the concept of an ‘insurance transaction’ that is exempted under that provision.” In fact, the AG suggested that that principle of fiscal neutrality would be breached if services that do not meet the criteria of the concept of insurance could benefit from the exemption as insurance.

In any event, the AG pointed out that the principle of fiscal neutrality is not a rule of primary law that can determine the extent of an exemption nor can it extend the scope of such an exemption in the absence of clear wording to that effect.

Comment

Whilst the opinion contains a detailed consideration of the nature of the concept of insurance in both the insurance and VAT Directives, ultimately the AG concluded that insurance involves the acceptance of risk and pension fund management does not fall within such a concept of insurance.

Perhaps equally interesting from a legal perspective is the dismissal of any argument based on the principle of fiscal neutrality. The fact that HMRC historically allowed investment management by insurers to (incorrectly) be treated as exempt was no basis for exempting the provision of similar services by non-insurers.

The AG’s opinion is influential, but it is not binding on the Court, and it may be another four to six months before the decision of the ECJ. If the Court follows the AG’s opinion, or otherwise reaches the same conclusions for different reasons, that is likely to be the end of this long running dispute.

For now, affected businesses should maintain claims for VAT accounted for on supplies of investment management services to defined benefit pension funds and protect any rejected claims with appeals to the Tax Tribunal.