A busy time for pension funds!
March 2014 saw the fourth in a series of significant pension fund related decisions of the Court of Justice of the European Union (CJEU) which are of major importance to Irish employers, pension fund managers and pension schemes.
First, in Deutsche Bank AG (Case-44/11) the provision of discretionary investment management services which consisted of “analysing and monitoring” the securities portfolios of client investors, taking decisions on the purchase and sale of securities in a client’s portfolio, and executing those transactions, constituted a single supply, even though the portfolio management fee had two component elements: one for the portfolio management and one for the sale of the securities.
While VAT exemption was available for “transactions in securities” when viewed as a whole, the exemption was not wide enough to apply to the discretionary investment management service as a whole and so the entire fee was liable to VAT.
While this case has the potential to apply to the provision of investment management to Irish pension funds to make all such fees chargeable to VAT either directly or on a reverse charge basis, the specifics of the decision leave it open for the discretionary investment management and the execution elements to be provided from two separate providers or perhaps structured to constitute two elements that are separate and distinct supplies.
Until such time as the Revenue confirm their position in light of this case, their historic approach to the provision (or receipt) of pension fund management services can continue, namely, that, subject to certain conditions, the management services can be disaggregated in to administration and data processing, which are VATable, and dealing in or execution of shares/securities transactions which can be VAT exempt.
Pension funds and their managers should review the structure and VAT treatment of the services received and supplied to ensure that the separate elements are correctly and clearly identified, and accurately costed.
Second, the decision in Fiscale eenheid PPG Holdings BV cs te Hoogezand – PPG - (Case C-26/12) will permit employers to deduct VAT paid on services relating to the administration of its employees’ pension fund and the management of the assets of the pension fund, including reverse charge VAT.
Employers should be conscious, however, that if the services are charged to the pension fund that VAT liability will arise on the charge made to the fund for the services.
Both employers and pension funds should examine the contractual arrangements currently in place for pension fund management services (administration and investment related), the VAT treatment of those services, the VAT currently treated as being their input VAT (including reverse charge VAT), and the extent to which the current arrangements fall within the terms of the PPG decision.
Third, the decision in Wheels Common Investment Fund Trustees Limited & Others -Wheels - (Case C-424/11) is directly relevant to pension fund managers and pension fund trustees, and will impact all employers with occupational pension schemes. Wheels is a pooling vehicle for the assets of a number of underlying Ford Group pension schemes. Fund managers were appointed to manage those assets, and they charged VAT on their services. One of the managers took the view that the management fees should be VAT exempt given that a defined benefit scheme, such as Wheels, should be treated as equivalent to a ‘special investment fund’ given that the members’ and employer’s contributions are pooled in order to generate a return from a spread of investments and that a defined benefit fund was similar to and in competition with other collective investment vehicles, the management of which is VAT exempt.
The CJEU did not agree and confirmed that defined benefit (DB) pension schemes are not special investment funds – and hence their management cannot fall within the exemption for the management of special investment funds.
The CJEU made three key points
- Unlike special investment funds, occupational pension schemes are not open to the public.
- The members of DB pension schemes do not bear any of the investment risk. Their entitlement to a pension depends on factors like final salary or years in service, and not on the value of the scheme assets or the performance of the investments.
- Although the employer does bear the investment risk, it is not in a comparable position to an investor in a special investment fund. It pays contributions into the pension fund to comply with its legal obligations to its employees.
On this basis, supplies of management services to defined benefit pension funds cannot fall within the fund management exemption – and will be subject to VAT (unless they can fall within another exemption).
This case has effectively settled the position of DB pension schemes although there may be opportunities to implement alternative structures such as pooled investment vehicles to minimise the amount of irrecoverable VAT incurred (see ATP below).
While the management of defined benefit pension funds cannot fall within the fund management exemption, PPG (above) may apply to provide an opportunity for employers (and potentially pension funds) to maximise the recovery of the VAT incurred on pension scheme costs.
Moreover, while Wheels (above) was specifically about the management of defined benefit pension funds, the CJEU found that a fund holding the assets of a pension scheme could not be a ‘special investment fund’ “where the members of the scheme do not bear the risk arising from the management of the fund” (and where the employer only pays into the scheme to comply with its legal obligations towards its employees). This suggests that the CJEU’s judgment may have been different in the case of a defined contribution pension scheme and this leads us on to the fourth of the four pension related decisions, and one which was released earlier this month - ATP PensionService A/S - ATP - (Case C-464/12).
In ATP, not only did the CJEU provide further clarification on the key tests required for a fund to qualify as a ‘special investment fund’ for the purposes of the management exemption, but it also expanded on the activities falling within the meaning of the ‘management’ of such a fund and therefore exempt. This decision has potentially important ramifications across a range of market participants including funds, fund managers, administrators, and general outsourcers.
In contrast to Wheels (above) in ATP the CJEU ruled that defined contribution pension schemes should be treated on a par with other special investment funds for the purposes of the VAT exemption.
The Court outlined the following three key tests to determine whether a fund would qualify as a special investment fund for the purpose of applying the exemption, namely that the scheme:
- Is funded by the persons to whom a retirement benefit is to be paid;
- That the savings are invested using a risk-spreading principle; and
- The customer (i.e. investor) bears the investment risk.
The Court considered that it was of little consequence in determining the VAT liability in terms of: who makes contributions; how and when pensions are paid to the contributor; national income tax provisions; and whether there is an ancillary insurance element.
The Court went on to set out a potentially wide-ranging interpretation of the services which can constitute the ‘management’ of a special investment fund, including:
- Registration and reporting functions;
- Opening of accounts;
- Provision of facilities for the handling of payments;
- Crediting contributions to customers’ accounts;
- Processing data and recording of missing payments; and
- Issuing account statements.
In summary, the CJEU has confirmed that:
- Defined contribution pension schemes may fall within the exemption provided a number of conditions are met, namely: they are funded by the persons to whom the retirement benefit is paid, the funds are invested using a risk-spreading principle, and the pension customers bear the investment risk;
- It is of little consequence that the contributions were paid by the employer, or that there are different ways of paying out the funds invested;
- That the term ‘management of special investment funds’ should include the opening and crediting of accounts, accounting services and account information services; and
- That the exemption available for payments and transfer services should apply to the creation of pension customer accounts, the crediting of those accounts of the contributions paid, and any transactions which are ancillary to those services.
For DC pension schemes:
- DC pension funds should contact their suppliers to determine whether their supplies should have been exempt from VAT as “management”. This may now include more services than previously fell under the exemption.
- Where VAT has been incorrectly charged based on the ATP principles, the relevant suppliers should be contacted to request a refund of this VAT and schemes should act to protect their position for the last four years. For services received from overseas, they should review whether reverse charge VAT has been over-accounted for.
For fund managers and administrators:
- If supplies made to DC pension funds are currently treated as taxable, these supplies should be reviewed to determine whether they should have always been treated as exempt.
- If this is the case, the output VAT should be reclaimed from Revenue over the last four years (less any input tax which has been over-recovered), and refunded to the schemes.
For outsourcers and payment processors:
- The VAT liability of payment processing is a complex area and is subject to ongoing litigation. The judgment indicates that the scope of this exemption is wider than some tax authorities have construed.
- Those providing outsourced services and payment processing (to any third parties, not just pension schemes) should re-examine their existing treatment of these services to determine whether they now fall within the wider scope of the exemption as suggested by ATP.
For further information on any of the above pension related cases, contact a member of the Deloitte VAT team.