VAT, Asset Management & Pensions Nick Skerrett Heather Rowlands Crystal Randles-Mills FI & AMIF Autumn Legal Update 2017
Introduction Update on the case law concerning the VAT liability of investment management services supplied to pension fund customers Potential claims by customers and the implications of the Supreme Court decision in Investment Trust Companies (in liquidation) v HMRC Customer relations Change in HMRC policy for supplies of investment management services by insurers Compound interest Questions 1 / B_LIVE_EMEA1:4524158v1
Case law update Exemption for the management of special investment funds Article 135(1)(g) of the Principal VAT Directive exempts from VAT transactions comprising the management of special investment funds as defined by member states. Implemented in the United Kingdom at items 9 and 10 of Group 5 of Schedule 9 to the Value Added Tax Act 1994. Claims made on the basis that: A pension funds is a SIF for the purpose of Article 135(1)(g). Alternatively, pension funds are economic operators carrying out the same transactions as other collective investment vehicles that do qualify as SIFs, such that the UK s failure to treat pension funds in the same way as is inconsistent with the Community law principle of fiscal neutrality. 2 / B_LIVE_EMEA1:4524158v1
Case law update Wheels Common Investment Fund Trustees v HMRC In March 2013 the European Court confirmed that DB pension schemes do not qualify as SIFs, nor does the principle 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. Following the decision of the European Court, the proceedings were referred back to the First-tier Tax Tribunal where they were stayed generally. Large majority of taxpayer claims are stood behind Wheels. 3 / B_LIVE_EMEA1:4524158v1
Case law update United Biscuits (Pension Trustees) Limited v HMRC Alternative argument based on Article 135(1)(a) of the Principal VAT Directive, which exempts from VAT insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents. Management of group pension funds is a category of life assurance related activity as defined for the purposes of European Community law, with the result that it falls within the scope of the exemption irrespective of the status of the supplier. Alternatively: o o o for the periods to which the claim relates, HMRC did not dispute that a supply of investment management services to a pension fund by a person carrying on a regulated insurance business is exempt; from the point of view of the pension fund recipient, the supply of investment management services is identical and serves the same purpose regardless of whether the supplier is an insurer or not - the only difference for the pension fund is that VAT would attach to supplies made by or received from the noninsurer ; the distinction drawn by HMRC between supplies of investment management services made by insurers and supplies of investment management services made by non-insurers was contrary to the principle of fiscal neutrality and therefore unlawful i.e. EU law requires neutrality of treatment as between suppliers of the same services. Wheels granted permission to amend its case and stay pending outcome of United Biscuits. 4 / B_LIVE_EMEA1:4524158v1
Case law update ATP Pension Service A Danish case concerning pension fund administration services supplied via a platform to a third party fund manager. The European Court held that an occupational pension scheme can be categorised as a SIF for the purposes of the exemption where the contributions to the scheme and the risks of investment are borne by the scheme members. HMRC issued guidance confirming that it will accept a defined contribution pension fund as a SIF provided the following criteria are met: they are solely funded (whether directly or indirectly) 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; and the risk borne by the pension customers is spread over a range of securities. Decision supports a wide definition of management for the purposes of the exemption. Provided that the services constitute a distinct whole and are specific to and essential for the management of SIFs, they will qualify for exemption even where they are not performed by the investment manager but are outsourced. 5 / B_LIVE_EMEA1:4524158v1
Case law update What does this mean / next steps Any outstanding claims for VAT accounted for on supplies of investment management or administration services to DC pension schemes should be pursued for payment. To the extent not already done so, HMRC will be inviting you to amend any DB claims that still rely on the SIF exemption to rely on the exemption for insurance transactions instead. Once amended the claims should remain stayed pending the outcome of United Biscuits and / or Wheels. Anticipate it being a number of years until this is resolved finally. Until that point, you should continue to keep the DB claims topped up to avoid any periods falling out of time as a result of the 4 year capping rules in the VAT Act. 6 / B_LIVE_EMEA1:4524158v1
Investment Trust Companies (in liquidation) v HMRC The Supreme Court decision The investment trust company claimants sought to recover from HMRC directly VAT that they had been unable to recover from their suppliers. Shortfall arose in two ways: The operation of the statutory time limits in the VAT Act leaves a period from December 1996 to the early / mid 2000s for which the managers are time barred from seeking to recover overpaid VAT from HMRC (the Gap Period ). Asset managers incur input tax on goods and services that they receive from third party suppliers, which they deduct when accounting to HMRC for VAT on their own supplies. If the managers had recognised at the relevant time that they were making exempt supplies, this input tax would not have been recoverable and would have been a cost borne by the managers. In the Investment Trust Companies case, the parties assumed that out of every notional 100 of VAT that the managers charged to the funds, only 75 was paid on to HMRC. Supreme Court confirmed that a consumer does not generally have a right to recover VAT that it has overpaid to its supplier from HMRC directly. The customer s right to recover overpaid VAT is directed at the supplier, subject to a potential change of position defence. 7 / B_LIVE_EMEA1:4524158v1
Investment Trust Companies (in liquidation) v HMRC Implications of the Supreme Court decision The decision poses difficulties for the United Biscuits claimant, which is also seeking to recover VAT that it says it overpaid to its suppliers from HMRC directly. Where customers have paid VAT in respect of supplies that are later confirmed to have been exempt, potential exposure to claims for more than the manager can recover from HMRC. The potential change of position defence means that the risk in relation to the Gap Period is likely to be low. The situation is different for the notional 25s which were never paid over to HMRC and where the manager may be enriched at the expense of the customer. 8 / B_LIVE_EMEA1:4524158v1
Reimbursement to Customers (I) Can you just reimburse customers the 75s? Or do you have to refund the 25s? Should you be evaluating financial exposure to manage expectations? No exemption = no issue. There are hurdles to overcome: United Biscuits test case will it crumble? Timeline to resolution through appeal stages. Wheels as a successor challenger? Or AN Other case? Fundamental issues faced by insurance argument. 9 / B_LIVE_EMEA1:4524158v1
Reimbursement to Customers (II) If exemption cases succeed, what will HMRC s stance be? Unjust enrichment vs net? Net of nets? Input tax recovery position of funds. Mistake of law claims horizontal direct effect. Unjust enrichment plus detriment. Limitation when does 6 years run? 10 / B_LIVE_EMEA1:4524158v1
Reimbursement to Customers (III) Contractual position? Silent? Express refund obligation? Exclusion of restitution? Repricing provisions? Limitation? Time? Value? Notification? 11 / B_LIVE_EMEA1:4524158v1
Reimbursement to Customers (IV) What will your competitors do? Reputation? Protect customer relationships? Treating customers fairly? 12 / B_LIVE_EMEA1:4524158v1
Revenue & Customs Brief 3/2017 (I) Effective 1 January 2018. Withdraws exemption for fund management services provided by insurers to pension funds. Exemption only available if the recipient of a supply if a SIF. Reflects CPP position on scope of insurance exemption. Burden on insurers to identify nature of customer and scope of SIF exemption to determine VAT status of supplies. Insurers will need to charge VAT, resulting in irrecoverable input tax for non-sif clients. 13 / B_LIVE_EMEA1:4524158v1
Revenue & Customs Brief 3/2017 (II) HMRC view mainly DC schemes managed by insurers misguided. Part of defence position in United Biscuits. Levelling up of playing field everyone is a loser. Serious cost consequence for DB schemes and sponsoring employers. What about life wrapped AUTs/OEIC equivalents? Exemption for administration lost too. 14 / B_LIVE_EMEA1:4524158v1
Withdrawal of the insurance exemption Business challenge virtually no implementation period. Hard deadline to start charging VAT contract checks, systems, client notifications. Cost will drive business decisions do clients switch to UCITS funds/sifs? Risk of business loss. Opportunities for exemption and restructuring Z classes, ACFs. Optimum position have proposition to migrate clients to. 15 / B_LIVE_EMEA1:4524158v1
Compound interest Littlewoods Heard by the Supreme Court in July 2017. Supreme Court has confirmed that: Value Added Tax Act 1994 excludes restitutionary claims for the time value of overpayments; Section 78 and 80 of the Value Added Tax Act provide an exhaustive statutory remedy; Supreme Court initial view that this does not give rise to a breach of Community law Decision expected this month on whether a further reference to European Court is needed. Will a further reference keep the issue alive? What does this mean for existing and future compound interest claims? 16 / B_LIVE_EMEA1:4524158v1
Q&A
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