The Value Added Tax (Finance) Order 2020 aligns UK law with EU law regarding VAT on the supply of fund management services to DC occupational pension schemes, following the 2014 CJEU decision in the ATP case. It provides that such services are exempt from VAT from 1 April 2020.
Such an exemption can already be claimed under directly applicable EU law but, because of what UK law said until now, did not have to be (eg, if this input VAT is set off against output VAT); from 1 April there is no choice – the supply is exempt. Note that many DC fund management arrangements are provided under an insurance wrapper, to which a VAT exemption applied before (and after) the ATP case: this development is therefore not relevant to them.
Since the European Court decision in ATP in March 2014 (see WHiP Issue 45), management services supplied to a DC pension scheme are capable of falling within the VAT exemption for management of a "special investment fund".
In its guidance issued after the judgment (see WHiP Issue 49), HMRC accepted this outcome and set out four criteria that needed to be met by a pension scheme in order to qualify, as follows (our understanding is that most DC schemes meet these):
- They are solely funded (directly or indirectly) by the beneficiaries that will receive the retirement benefits to be paid under the scheme.
- The beneficiaries bear the investment risk.
- The fund contains the pooled contributions of several beneficiaries.
- The risk borne by the beneficiaries is spread over a range of securities (or "investments" in the words of the new
regulations).
The alignment might have ramifications as follows:
- DC pension schemes should no longer be paying VAT on supplies of management services they receive and might not realise that that is the case.
- External managers of DC pension schemes will need to exempt their supplies, which is likely to have a negative knockon effect on their VAT recovery position.
- Managers might therefore wish to consider whether their own suppliers should be exempting their supplies to the manager (on the basis that those supplies amount to "management" of the DC scheme, notwithstanding that the supplies are not made directly to the scheme – the case law is clear that this is possible).
This is an extract from our 81st issue of What's Happening in Pensions.
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