681 vat draft fund management...
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Circular No: 681
Committees: Administration, Defined Contribution and Legislation Committees
Date: March 22nd 2016
Our Ref: JM/JB 4.7 Dear Colleagues,
VAT: DRAFT FUND MANAGEMENT GUIDANCE
HMRC has published the attached draft documents on VAT and Fund Management. Kind regards, John Mortimer Secretary
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John Mortimer
From: [email protected]: 18 March 2016 12:03To: [email protected]; [email protected]; [email protected];
[email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; John Mortimer; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; IMCEAMAILTO-Duncan+2EBuchanan+40hoganlovells+2Ecom@not.to.be.used; [email protected]; IMCEAMAILTO-Christine+2EMcConnell+40actuaries+2Eorg+2Euk@not.to.be.used; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]
Cc: linda.o'[email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]; [email protected]
Subject: Draft Fund Management GuidanceAttachments: VIT40000 New PPG Guidance - Draft.doc; VATFIN5100 ATP - Draft.docx; VATFIN5350 -
Draft.docx; VATFIN5300 - Draft.docx
Dear All,
Please find attached draft HMRC guidance rewrites which update the VAT Input tax and VAT Finance guidance manuals in respect of the CJEU judgments in PPG, ATP and Fiscale Eenheid X. These rewrites mainly incorporate and expand on changes in VAT treatments previously announced in our Revenue & Customs Briefs. There are no substantive additions to VATFIN300 but it has been included because text has been removed to reflect changes relating to the assets that can be held in a qualifying fund following the judgment in Fiscale Eenheid X. We would welcome any comments, suggested amendments or requests for further clarification on any of the areas covered but please remember that these drafts should not be considered in isolation and need to be viewed in the context of the relevant guidance manual as a whole. Also, formatting & numbering will be finalised prior to publishing so please ignore this for the purposes of this consultation. We would like to get these published ASAP so would appreciate any feedback by Friday 15th April if possible but please let me know if you are going to need more time to respond. Do feel fee to share with others in your organisations. Kind regards Barbara Barbara Farndell HMRC, VAT & IPT Policy Manager VAT Deductions & Financial Services Team Floor 3/35, 100 Parliament St, London SW1A 2BQ 03000 585917
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VIT44600 – Specific issues: funded occupational pension schemes
Employers often provide funded occupational pension schemes which may be a defined contribution scheme (also known as money purchase), a defined benefit scheme, or a hybrid
scheme with features of both. A funded occupational pension scheme is one in which the contributions are vested in a trust.
Each party (the employer and the trustees) have separate responsibilities, duties and undertake different activities. Each has to consider its own entitlement to treat tax incurred as input tax. In running schemes various professional services are required. These might include the services of solicitors, fund managers and actuaries. In practical terms it can be difficult to decide who these services are supplied to and for the purposes of whose business they are
used.
An employer may also provide pensions to his employees by means of personal pension schemes. These may also be established under a trust, or may be contract based.
Following the CJEU decision in Fiscale Eenheid PPG Holdings BV cs te Hoogezand (c-26/12)
(PPG) the UK rules on input deduction in respect of funded, trust based occupational pension schemes changed. There was a transitional period, running from 3rd February 2014 when
HMRC first announced the policy change until 31st December 2015, during which time taxpayers could use either the old rules or the new rules. The transitional period was later extended to 31st December 2016. Taxpayers may switch to the new arrangements at any time during the transitional period subject to both the employer and pension scheme trustees agreeing and only the new arrangements being applied from that time onwards. From 1st January 2017, the new rules must be applied.
The following guidance on pension schemes is therefore divided into two sections; the first
outlining the rules that can only be used for services received by 31st December 2016 and the second outlining the new rules that apply following the judgment in PPG and that must be used for services received from 1st January 2017 onwards.
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VIT44700 – Specific issues: employers with funded pension schemes –
arrangements that could be applied prior to 1st January 2017
Prior to 1st January 2017, a VAT registered employer that established a funded occupational pension scheme for its employees could treat VAT incurred in setting up the scheme as its input tax. It could also treat VAT incurred on the day-to-day administration of the scheme as its input tax, even when it did not contract and pay for these services.
This applied even where the trustee was responsible for the general management of the scheme under the trust deed and where the trustee contracted and paid for the services supplied. Although employers had to hold tax invoices made out in their own name in order to
be able to deduct, trustees who contracted and paid for supplies were able to arrange for invoices to be made out by the supplier in the name of the employer. However, guidance was clear that there was a distinction to be made between administration costs and investment costs. This was because the investment costs are used to enable the trust to buy and sell securities. HMRC previously took the view that these costs could not be attributed to the employer’s business activities and accordingly VAT incurred in carrying on investment
activities was not the employer’s input tax even if they paid these expenses on behalf of the trust.
Administration services included:
making arrangements for setting up a pension fund;
management of the scheme, that is the collection of contributions and payment of
pensions;
advice on reviewing the scheme and implementing changes to it;
accountancy and auditing relating to management of the scheme, such as preparation of the annual accounts;
actuarial valuation of the assets of a fund;
general actuarial advice connected with administration of the fund;
providing general statistics in connection with the performance of a fund’s investments
or properties; and
legal instructions and general legal advice, including drafting trust deeds, insofar as it
relates to the management of the scheme.
Investment services included:
advice connected with making investments;
brokerage charges;
rent and service charge collection for property holdings;
producing records and accounts in connection with property purchases, lettings and disposals or investments;
trustee services, that is services of a professional trustee in managing the assets of
the fund;
legal services paid on behalf of representative beneficiaries in connection with changes in pension fund arrangements; and
custodian charges.
Where an employer incurred costs of the pension scheme, it may have recharged these onto the trustees. If the costs charged on were for administration services, the employer did not have to charge output tax on these costs, but where similar arrangements were adopted for
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investment services or other services connected with the pension fund’s activities, the
employer did have to.
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VIT45000 – Specific issues: third parties providing both management and
investment services to funded occupational pension schemes –
arrangements that could be applied prior to 1st January 2017
A fund manager, property manager or professional trustee may be appointed to manage a scheme. Their charges may relate to both administration and investment services provided in respect of the trust.
When the supplier issued a single tax invoice for a single supply comprising both administration and investment management services, an apportionment between these
services was necessary. The employer could treat the VAT on the administration element as its input tax. The investment element was received by the trustees.
HMRC accepted, by way of a simplification, that 30% of the cost related to the administration services when the third party:
provided both the pension fund’s administration and investment services; and
issued one VAT invoice for both of the services.
Any employer who did not consider that 30% was a fair proportion of the supply to attribute to administration services was required to provide evidence to HMRC to support this view.
A third party could themselves apportion their supply between investment and administration services and issue separate invoices. When this happened the employer was entitled to treat the whole of the VAT incurred on administration costs as their input tax and was not permitted to treat any of the VAT incurred on the investment costs as their input tax.
If an employer sought to recover:
100% of VAT detailed on an invoice for administration services and
30% of VAT detailed on a single invoice for both administration and investment services
then applying the 30% simplification would have been unlikely to give a reasonably accurate
result, because the administration element of the single invoice would probably have been
very small. When the result of the apportionment was not fair the employer was required to use an alternative method. The alternative method was required to reflect the proportion of the supply attributable to administration services.
More on how to attribute services between administration and investment activities is given at VIT45300.
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VIT45300 - Specific issues: attribution of services received in connection
with funded pension schemes – arrangements that could be applied prior to
1st January 2017
This list sets out HMRC’s view of how services obtained in connection with funded occupational
pension schemes were to be attributed for VAT purposes.
The following services could be attributed to both administration and investment
regular meetings with clients
cash management
preparation of performance statistics
preparation of valuations
Services that could be attributed only to administration activity
regular meetings with consulting actuaries
submission of data to independent performance monitoring service
programming and provision of relevant computer support for valuations and
performance statistics
Services that could be attributed only to investment activity
investment management - asset allocation and stock selection
investment research, including relevant travel - UK and overseas
economic research, including relevant travel - UK and overseas
dealing in securities in UK and overseas markets on behalf of clients
keeping detailed accounts of all investments, receipts, disbursements other
transactions
review and control of investment portfolios
preparation of contract notes
preparation of schedules of transactions
preparation of specialist market commentaries
safekeeping of property and securities in own name or name of nominee or in bearer
form
appointment of and responsibility for sub-custodians domestic or foreign
provision of nominee service
maintenance of securities accounts, stock registration and transfer
collection of dividends and interest and obtaining new coupon sheets
recovery of tax
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administration in respect of
o capital repayments; and
o capitalisation issues
administration in respect of company meetings and, in particular, execution of forms of proxy as appropriate
o conversions;
o exchanges;
o liquidation
o distributions;
o redemptions;
o right issues; and
o payment of calls
programming and provision of relevant computer support for
o investment management; and
o investment administration and control
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VIT45400 Specific issues: attribution of services received in connection with
funded occupational pension schemes – arrangements that apply following
the CJEU decision in PPG and which must be used from 1st January 2017
The policy on the recovery of VAT incurred in relation to the management of pension schemes changed following the decision of the CJEU in Fiscale Eenheid PPG Holdings BV cs te Hoogezand (C-26/12) (PPG). The case concerned PPG’s entitlement to deduct VAT paid on services relating to the administration of defined benefit (DB) pension schemes and the management of their assets. The CJEU decided that, subject to certain conditions, the
employer (PPG) was entitled to deduct the VAT it paid on services relating to both administration and management of the assets of the pension fund. This was contrary to the position previously taken by HMRC, whereby the VAT on administration services was deductible by the employer but not the VAT on investment management services.
Following the decision in PPG there are now circumstances where employers may be able to claim VAT incurred on investment management services as well as administration services.
Before deciding whether the VAT on services may be deductible by an employer it is important
to determine whether the services in question are supplied to the employer. In the case of funded occupational pension schemes, there are normally two potential recipients of the supplies: the employer and the pension scheme through its trustees. Determining which party is the recipient of a supply of services is fact sensitive and will depend upon the circumstances in which the transaction took place.
A fundamental criterion to consider is economic reality and the most useful starting point is to
examine the agreements between the parties. Whilst the fact that a party pays for the supplies is not decisive, and payment may be third party consideration for supplies made to another party who is the actual recipient of the supplies, payment is an important indicator, particularly in cases where two parties use the services.
Accordingly, the VAT incurred in relation to a pension scheme will not be deductible by an employer unless there is contemporaneous evidence that the services are provided to the employer and, in particular, the employer is a party to the contract for those services and has
paid for them.
In order to deduct, a business will require a valid VAT invoice. Where an employer is engaged in non-business activities or makes exempt supplies, they will need to take these into account when deducting any VAT incurred and restrict their deduction accordingly.
There will be some VAT bearing costs in relation to pension funds which the trustees must contract for because of pension regulations. For some of these services, for instance investment management services provided in respect of a DB scheme, the use of tripartite
contracts may enable the VAT to be treated as incurred by the employer (VIT45430).
Alternatively, there are other sets of contractual arrangements which businesses may wish to adopt and will affect the overall VAT deduction (VIT45440, VIT 45450 and VIT45460).
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VIT45410 Specific issues: when employers should charge output tax in
connection with funded occupational pension schemes – arrangements that
apply following CJEU decision in PPG and which must be used from 1st
January 2017
If an employer receives a taxable supply of administration and/or investment management services and recharges the cost onto the pension scheme, that recharge is consideration for an onward supply. The trustees use the services, and are charged a consideration. VAT is due
accordingly. This VAT is potentially deductible by the pension scheme to the extent that it is engaged in taxable business activities.
Pension scheme trustees and employers will normally regularly review the level of contributions required by the employer into its pension fund/s to ensure those funds are able to meet the forecast pension benefit commitments. HMRC accept that if adjustments are made to these contributions, to take account of the fact that it is the employer rather than the fund that is paying for certain costs, that does not constitute consideration for a supply by the
employer to the pension fund. This is provided that there is no specific reduction equal to the
actual costs that were incurred in any given period.
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VIT45420 – Specific issues: when trustees of funded occupational pension
schemes can claim input tax
A trust based pension scheme is represented by its trustee(s). A scheme, through its trustees, may make taxable supplies by, for example, opting to tax supplies of property. The trustee(s) of a scheme making taxable supplies may be VAT registered.
If it is VAT registered a trustee can treat as input tax VAT incurred on goods and services used, or to be used, for the purposes of its business. Where a trustee makes exempt supplies their recovery of input tax is only possible to the extent that they make taxable supplies.
However, if the trustees are themselves VAT registered they may treat the tax incurred on
services connected with the continuing management of the scheme as their input tax. Any claim is subject to the normal rules. This is likely to mean that not all the tax on the management services can be recovered because the trustees will normally make exempt supplies or be engaged in non-business activities.
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VIT45430 Specific issues: attribution of services received in connection with
funded occupational pension schemes following CJEU judgment in PPG – use
of tripartite contracts
A tripartite contract between a supplier, pension scheme trustee and employer may be used to meet the requirement that an employer contracts for services outlined in VIT45400 in order to deduct the VAT incurred on those services. This will be subject to the contract meeting the requirements set out below and the services relating to a defined benefit (DB) pension scheme. This only applies in the context of DB pension schemes because the regulatory
regime requires such schemes to be established under a trust and it is the employer that ultimately bears the financial risks and benefits associated with the performance of the scheme. It does not therefore apply where the contract relates to services provided to a defined contribution scheme (DC) because the employer does not bear the same level of financial risks/benefits associated with the performance of the fund. However many costs incurred in relation to DC schemes will be exempt [please see VATFIN….. for further information on this]
Given the unique nature of these DB pension arrangements HMRC accept that both the trustees and the employer are potential recipients of services relating to the management of the pension scheme. Accordingly, the person who contracts and pays for the services are important factors in determining the recipient of the supply. An employer may therefore be able to deduct VAT incurred on these services in line with its residual recovery position where, as a minimum, the tripartite contract with the service provider evidences that:
the service provider makes supplies to the employer (albeit that the contract may recognise that, in the particular regulatory context in which DB schemes operate, the service provider may be appointed by, or on behalf of, the pension scheme trustees)
the employer directly pays for the services that are supplied under the contract
the service provider will pursue the employer for payment and only in circumstances where the employer is unlikely to pay (for example, because it has gone into
administration) will it recover its fees from the scheme’s funds or the pension scheme trustees
both the employer and the pension scheme trustees are entitled to seek legal redress in the event of breach of contract, albeit that the liability of the service provider need
not be any greater than if the contract were with the pension scheme trustees alone and any restitution, indemnity or settlement payments for which the service provider becomes liable may be payable in whole to the pension scheme trustees for the benefit of the pension scheme (for example in circumstances where the scheme is not fully funded)
the service provider will provide fund performance reports to the employer on request
(subject to the pension scheme trustees being able to stipulate that reports are withheld, for example where there could be a conflict of interest)
the employer is entitled to terminate the contract, although that may be subject to a
condition that they should not do so without the pension scheme trustees prior written consent (this can be in addition to any right that the pension scheme trustees may have to terminate the contract unilaterally)
In addition to the above, evidence that the pension scheme trustees agree that it is the employer who is entitled to deduct any VAT incurred on the services will reduce the potential for disputes.
For an employer to be able to deduct any VAT, it will be necessary for them to be issued with a valid VAT invoice for the full cost of the supply and to pay the service provider directly. HMRC do not accept that an equivalent increase in contributions to the fund or any payment that is made by, or through, the fund constitutes payment by the employer.
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This arrangement may have implications for an employer’s Corporation Tax deduction, in that
where an employer pays directly for asset management costs under a tripartite contract HMRC’s view is that the employer is not entitled to a Corporation Tax Deduction.
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VIT45440 Specific issues: attribution of services received in connection with
occupational funded pension schemes following CJEU judgment in PPG –
Supply of Scheme Administration services by pension trustees to an
employer
If a pension scheme trustee contracts with an employer to make an onward taxable supply of running their pension scheme on their behalf any input tax that the trustee incurs on administration and other general pension scheme related services that are used by it in order
to make the onward taxable supply to the employer will be deductible. This applies even where the trustees contract for supplies of legal or actuarial services that are specific to the trustees activities and are performed in the interests of the trustees, such interests potentially conflicting with those of the employer, provided that those services are used by the trustees to make their onward supplies to the employer.
However, where the services provided by a trustee incorporate within those services the management of the assets of the trust, any asset management costs incurred by the trustees
are used both for the trustees supplies to the employer and also for the trustees’ ongoing
investment activities. Any VAT incurred on those asset management costs accordingly has a direct and immediate link to both the supply to the employer and to the investment activities. This means that any deduction of such VAT will need to reflect that dual use and be apportioned between the two activities on a fair and reasonable basis.
In the case of defined contribution (DC) pension schemes, many investment management and
administration services supplied in respect of these schemes will be exempt. However, some services fall outside the exemption. Where trustees incur such costs, the above guidance still applies to the extent that trustees are making a taxable supply to the employer. However, if the fund or funds which the trustees are responsible for are special investment funds (SIFs) and they make an onward supply to an employer which falls within the definition of pension scheme management, this supply will be exempt. In such a case the trustees will not be able to deduct the VAT on its costs to the extent that it uses those costs to make the supply to the
employer. In most cases the fund or funds in a DC scheme will be SIFS, although guidance on how to determine whether this applies in any particular case can be found in VATFIN…….
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VIT45450 Specific issues: Supply of services by holding company or service
company to an employer or employers
In some circumstances a holding company will provide services to its subsidiaries. Alternatively service companies may be set up to provide services to associated businesses. These services may incorporate various functions within them. Such functions may include the management of a pension scheme on behalf of the subsidiaries or associated companies who are acting as employers. Such an arrangement may also involve the use of tripartite contracts as per VIT5430 including both the holding/service company and also the pension trustees as contracting parties. In such circumstances, then any input tax incurred by the
holding or service company on the costs of managing the pension scheme that are used by it in order to make taxable supplies to the employer companies will be deductible.
Where the pension scheme involved is a defined benefit scheme, and where the holding or service company has no past or present employees that are members of the scheme, nor any responsibility for the liabilities of the scheme, then it is unlikely that this will prevent an employer’s Corporation Tax deduction because the employer will not be directly paying the
asset management costs.
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VIT45460 Specific issues: attribution of services received in connection with
occupational funded pension schemes following CJEU judgment in PPG – use
of VAT grouping
A corporate trustee of a pension scheme can, as the legal representative of that pension scheme, VAT group with an employer provided they meet the eligibility criteria set out in section 43A of the Value Added Tax Act 1994 (see chapter 2 of VAT Notice 700/2: group and divisional registration for further guidance). In those circumstances, any supplies made by
the trustee, including dealing in the assets of the scheme’s fund(s), are treated as being made by the representative member of the VAT group.
The cost of administration and other general scheme related services that do not have a direct and immediate link to the management of the pension scheme’s assets and therefore the scheme’s investment activity, will be overhead costs of the VAT group and will be deductible in accordance with the activities of the group as a whole. However, asset management services
incurred for the scheme’s investment activity will have a direct and immediate link both to
that investment activity and also the supplies of the employer. This means that any VAT deduction in respect of the VAT incurred on these services will need to reflect this dual use and be apportioned between the different activities on a fair and reasonable basis.
VAT incurred by group members can be deducted by the representative member to the extent that it is attributable to supplies made to persons outside the group which carry the right to deduct input tax. Any non-business activity and exempt supplies made by the employer or
trustee must be taken into account when considering VAT recovery.
A scheme that is a member of the VAT group (through its corporate trustee) may provide pensions for employees of companies that are not members of the VAT group. If it does not make a supply for consideration to those companies in respect of these services then any VAT incurred on managing of the scheme for those companies is not incurred for the purpose of the representative member’s business. To the extent costs are used for those purposes, the VAT incurred is not input tax. Tax incurred by the VAT group should accordingly be
apportioned so that only so much as relates to group members is treated as the group’s input
tax, unless the representative member acts as paymaster for the group (VIT45100).
Businesses have raised concerns that the effect of the joint and several liability provisions relating to VAT grouping mean that where a corporate trustee is VAT grouped, HMRC would be entitled to recover a VAT debt of the VAT group from the pension scheme assets. Our position is, and remains, that we are unable to recover VAT from the scheme assets except to the extent that the relevant VAT debt is attributable to the administration and operations of the
pension scheme.
It remains the case that all group members are jointly and severally liable for tax due from the representative member. However, in the case of a corporate trustee this liability does not extend to the assets of any fund(s) that they are responsible for managing as these are not the trustee’s assets and cannot be used to pay debts that are not the result of the trustees fulfilling their duties as trustees.
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VIT45600 - Specific issues: pensions provided for the employees of more
than one employer
This page of the manual does not apply where employers are members of the same VAT group registration. Group registration is explained in VAT Groups [link]
Some pension funds provide pension benefits for the employees of several employers. Those employers may have a commercial link or may be entirely separate from each other. Each employer can only treat as input tax that proportion of the VAT incurred on services relating to
the scheme as is attributable to their employees unless that employer makes supplies onto the other employers using those services (i.e. as a “paymaster”).
For instance services could be supplied in respect of a pension scheme that is used by entirely separate employers. The supplier may contract with one of the employers, or to a business specifically set up for the purpose, and issue a single invoice to them so that they may act as
paymaster and treat all the VAT on the services as input tax.
In order to deduct the VAT incurred on these services someone acting as paymaster must
recharge each of the employers with their share of the costs plus VAT. The paymaster must issue a VAT invoice to each of the employers. The employers can then treat the tax on those invoices as their input tax.
VATFIN5100 - Management of investments, portfolios, funds, ‘wrapper’
products and related services: exemption for the management of ‘special
investment funds’
Article 135(1)(g) of the Principal VAT Directive exempts ‘the management of special
investment funds as defined by Member States’.
Until 30 September 2008, UK law (Items 9 and 10, Group 5, Schedule 9 to the VAT Act
1994) defined the following funds for the purposes of the exemption:
Authorised unit trust schemes (AUTS)
Open-ended investment companies (OEIC)
Trust-based schemes (TBS)
AUTS and OEIC are UK open-ended collective investment schemes, regulated by the Financial
Conduct Authority (FCA) as authorised investment funds (AIFs).
TBS are single property schemes and none has been authorised in recent years. The category is
now largely redundant and was therefore removed from the VAT exemption with effect from 1
October 2008.
Claverhouse
Further changes from 1 October 2008 followed the ECJ judgment in JP Morgan Fleming
Claverhouse Trust plc C-363/05 (‘Claverhouse’) which ruled on the interpretation of the term
‘special investment funds as defined by Member States’.
The key points in this judgment were:
1. the term ‘special investment funds’ is capable of including closed-ended investment funds,
such as investment trust companies (ITCs)
2. Member States have a discretion to define ‘special investment funds’ for the VAT
exemption but, in doing so, must pay due regard to:
a. the purpose of the exemption
b. the principle of fiscal neutrality.
According to the Court in Claverhouse, the purpose of the exemption is to facilitate investment in
securities for investors through investment undertakings. This requires there to be VAT neutrality
between the direct investment in securities and investment through collective investment
undertakings, as the latter incurs a management charge. Furthermore, the Court said that there
must be equality of VAT treatment for funds which are similar to, and in competition with, funds
falling within the scope of the exemption such as those covered by the UCITS Directive (this sets
out common EU rules for the regulation of ‘Undertakings for Collective Investment in Transferable
Securities’). To the extent that it concerns funds covered by the UCITS Directive, therefore, the
term ‘special investment fund’ has a common meaning within the Community.
In consequence of this judgment, the exemption was extended so that there was a level VAT
playing field for all similar collective investment undertakings which compete in the UK retail
market (i.e. for investment by the general public) under comparable conditions. This included
closed and open-ended collective investment undertakings which meet the revised definitions
regardless of where they are established.
Authorised Contractual Funds
On the 28 June 2013 the FCA regulations were amended to include authorised contractual funds
(ACF) in the definition of collective investment schemes. This puts the newly introduced authorised
contractual fund (commonly known as the ‘tax transparent fund’) on the same regulatory basis as
AUTS and OEICs in the UK. At the same time as this regulatory change, ACFs were added to item
9 of the UK VAT law, thereby qualifying them as SIFs for the purposes of the fund management
exemption.
ACF is an authorised contractual arrangement to pool assets. It has no legal personality and does
not constitute an entity in its own right. The assets are held and managed on behalf of a number
of investors (participants) who are co-owners of the scheme. A contractual arrangement is
transparent for the purposes of tax and the participants remain responsible for any tax due on
their share of the income and gains in the fund. For this reason, an ACF is described as ’tax-
transparent’. There are two contractual fund types, the co-ownership fund and the partnership
fund.
Property Funds
In Fiscale Eeinheid X (C-595/13), the CJEU considered whether immoveable property/real estate
held by a company or fund with more than one investor is a “special investment fund” under
Article 135(1) (g) of the VAT Directive. The Court concluded that collective investment vehicles
investing in real estate should fall within the exemption provided that the Member State concerned
has made those vehicles subject to specific state supervision.
UK legislation currently confines the scope of the fund management exemption to funds that invest
“wholly or mainly in securities”. The judgment in Fiscale Eeinheid X however means that no
restriction should be placed on the nature of the assets in which a fund invests for exemption to
apply and UK legislation will be amended in due course to reflect this.
VATFIN5120 - Management of investments, portfolios, funds, ‘wrapper’
products and related services: exemption for the management of ‘special
investment funds’: Pension Funds
Defined Benefit Pension Schemes
In 2013, the scope of the UK exemption for the management of special investment funds (SIFs)
was again considered by the CJEU in the case of Wheels Common Investment Fund Trustees and
others C424-11 (‘Wheels’). In this case, the CJEU held that defined benefit occupational pension
schemes are not SIFs for the purposes of Article 135(1) (g) of the Principal VAT Directive. The
Court decided, in line with HMRC's policy in this area, that:
Defined benefit pension schemes are not collective investment undertakings within the
meaning of the UCITS Directive because they are not open to investment from the public.
Furthermore, members of these schemes (i.e. employees) do not bear the risks arising
from the performance of the assets invested in them but rather benefits are defined by
reference to salary and length of service on retirement.
Employers, who do bear some risk, pay into these schemes to comply with legal
obligations towards their employees so cannot be compared to investors in collective
investment undertakings.
Such schemes do not, therefore, compete with qualifying funds and cannot be SIFs for the
purposes of the VAT exemption.
Consequently, the CJEU confirmed that supplies of investment management services to defined
benefit pension schemes were standard-rated for VAT purposes.
Defined Contribution Pension Schemes
In ATP Pension Services “ATP” (C-464/12), the CJEU considered whether a defined contribution
occupational pension fund could be a special investment fund (SIF) and decided that it could on
the basis that, unlike in a defined benefit pension scheme, the employees’ pension benefits are
determined by the performance of the assets invested in the pension fund and it is therefore the
employee, rather than the employer, that bears the investment risk.
In light of the ATP judgment, it is now accepted that pension funds that have all of the following
characteristics are SIFs for the purposes of the fund management exemption so that the services
of managing and administering those funds are exempt from VAT:
they are solely funded (whether directly or indirectly, e.g. by an employer) 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
the risk borne by the pension customers is spread over a range of investments
In addition to funds that contain the pooled assets of defined contribution occupational pension
schemes, such as that at issue in ATP, funds that contain the pooled assets of personal pension
schemes and that have all of the above characteristics will also fall within the VAT exemption for
fund management services.
A pension fund will not pool assets if individual investors exercise an option to give directions as to
how their contributions are invested (e.g. in specific assets and/or funds external to the pension
fund) that overrides the investment powers of the trustee/pension provider. Such an arrangement
is commonly found in Self-Invested Personal Pensions Schemes (SIPPS) where, even if the scheme
has more than one member, the assets are ring-fenced to the individual members and invested in
line with their own personal investment strategy.
This does not apply, however, where schemes hold assets within a number of different funds and
each of those funds adopts a different investment strategy (e.g. high/low-risk, ethical investments
etc.) and investors have the option to decide which of these funds they would like to invest in
(including whether/when to move assets between those funds) but have no control over how their
contributions are invested within the funds themselves.
Mixed/multiple funds and hybrid pension schemes
Where pension schemes pay members’ contributions into a number of different funds, exemption
will only apply to services supplied in connection with funds that possess the characteristics
outlined above. Where the contributions of a number of schemes are paid into a single fund, it will
be necessary to consider whether that fund as a whole possesses all of the characteristics set out
above.
If a supplier is providing services to a hybrid scheme, i.e. a scheme which provides both DB and
DC benefits, then exemption will apply if those services are supplied in respect of the qualifying
funds/assets only. Where the supplier is making a single supply of services in respect of a hybrid
scheme as a whole, then the criteria for exemption will not be met and the services will be subject
to VAT.
VAT recovery on pension fund management costs
Following the CJEU judgment in PPG Holdings BV (C-26/12), HMRC has changed its policy on the
recovery of VAT charged on costs incurred in respect of funded occupational pension schemes. See
VAT Input Tax [link to PPG guidance]
DRAFT
VATFIN5350 - Management of investments, portfolios, funds, ‘wrapper’ products and related services: meaning of ‘management’
The VAT exemption covers the management charge or fee which is normally deducted periodically
from the assets in the special investment fund. For UK open-ended funds, the manager is required
by regulation to be a separate entity - the authorised corporate director (ACD) of an Open Ended
Investment Company (OEIC) or the operator (‘authorised fund manager’) of an Authorised Unit
Trust (AUT). Offshore funds structured as SICAVs are, strictly, managed by their boards of
directors. Contractual funds have a manager (operator) by constitution, because, like an AUTS, the
fund is not a legal entity itself. In all cases, though, it is common for functions to be delegated by
the manager/operator of the open-ended fund to specialist providers. Some closed-ended funds
manage themselves, but it is common for the company to appoint a third party investment
manager.
Abbey National
Following the judgment in Abbey National (C-169/04), it is clear that the term ‘management’
refers to the activities of administering the special investment fund as well as investment
management activities. This is particularly relevant when considering the liability of services
delegated by e.g. the ACD to a third party. In this case, investment management services
provided by a third party (usually under a mandate) are also exempt as part and parcel of the
management of the fund.
Similarly, if a third party is delegated to carry out a package of administrative services which
overall has the distinct characteristic of a single supply of fund management services, this too will
be exempt (see ECJ case GfBk below). However, some services will not have such a characteristic
- for example, the services of a solicitor may be required to draft, or assist in drafting, legal
documents which are essential to the operation of certain fund (e.g. a trust deed or prospectus).
Such services have the characteristic of legal services and so cannot fall to be treated as fund
management.
There is more potential for delegated administrative services to be seen as characteristic of fund
management with open-ended funds than with closed-ended funds. This is because the activities
which make up the administration of open-ended funds are more extensive and are prescribed in
their regulation. Also, a key feature of open-ended funds is the requirement for regular valuations
of the units, which requires inter alia knowledge of the number of units in issue. Services which
consist of this are peculiar to and so characteristic of the management of the fund.
GfBk
Since Abbey National, a further ECJ case, GfBk (C-275/11), considered the definition of
"management" for the purposes of the exemption. The Court found that the provision of
information and advice relating to the stock market, including the making of specific
recommendations on the purchase and sale of assets, to a fund manager providing investment
management services to special investment funds falls within the exemption on the basis that it
constitutes an activity of "management".
The Court stated that the fact that a third party's advisory and information services do not alter
the fund's legal and financial position does not preclude those services from falling within the
concept of "management" of a special investment fund provided they are closely related to the
specific activity of an investment fund and are distinct in function and nature.
It pointed out that in Abbey National it had held that administrative and accounting services fell
within that concept and thus, in GfBk, it was not important that it was the fund management
company and not GfBk itself that implemented the recommendations to purchase and sell assets.
In light of this judgment, exemption applies to the services of making recommendations to fund
managers to buy or sell assets where such services involve the constant monitoring of the fund’s
assets and are intrinsically connected to the activity that is characteristic of an investment
management company.
Management of Pension Funds
The CJEU judgment in ATP Pension Services [LINK to ATP guidance] found that management and
administration services that are integral (i.e. specific and essential) to the operation of a qualifying
pension fund will fall within the exemption.
Exemption will only apply to charges made by third parties for services provided in connection with
the management or administration of the contributions held in the pension fund itself. It will not
apply to services provided in connection with any other funds in which the contributions paid into
the pension funds may have been invested; although the management of such funds may qualify
for exemption on the basis that the fund is a special investment fund in its own right (e.g. an
Authorised Unit Trust). The fact that some or all of the costs of managing a fund in which a
qualifying pension fund has invested is being charged onto a pension scheme, and therefore borne
ultimately by the pension customers, will not bring services supplied in connection with non-
qualifying investment funds within the fund management exemption
Management of Property Funds
In Fiscale Eeinheid X [Link to FEX guidance] the CJEU found that the fund management exemption
does not cover the actual management of property held by a collective investment vehicle
investing in retail estate. The exemption only applies to activities relating to the selection,
purchase and sale of immovable property (i.e. investment management of the property assets)
and any associated administration and accounting services.
DRAFT
VATFIN5300 - Management of investments, portfolios, funds, ‘wrapper’
products and related services: VAT exemption for the management of closed-
ended collective investment schemes
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Item 10 (amended from 1 October 2008) exempts the management of ‘closed-ended collective
investment undertakings’.
In line with the Claverhouse case (VATFIN5100), fund management services for investment trust
companies (ITCs) and venture capital trusts (VCTs) are exempt from VAT. In addition, fund
management services in respect of any other closed-ended CIU which satisfies the conditions in
Note (6) are also exempt. The conditions in Note (6) take account of criteria similar to those for
the open-ended funds in item 9. This includes a comparable (albeit under different regimes) level
of regulation, and the market for investment by the general public in the UK. If the CIU satisfies
the conditions in the definition, it will qualify for the exemption regardless of where it is
established.
There is some consistency between these conditions and the definition which currently applies to
open-ended CIU in the UCITS Directive. This, too, refers to the sole object being investment of
capital raised from the public and the investment restrictions in that Directive ensure that
investment risk is spread across e.g. a range of securities. In interpreting ‘sole objective’, no
regard should be had to secondary investment aims - for example investing in particular markets
or in ‘ethical’ investments. Rather this means that the CIU must not carry on any significant
activity other than that of collective investment. In this context, incidental activities, for example
letting out space in a head office, should be viewed as de minimis and ignored. The fact that a CIU
might invest or reinvest funds arising from its investments or as part of its investment strategy
does not alter the objective of investing capital raised from the public. For example, many of them
borrow, or ‘gear’, but this is part and parcel of the objective of investment.
‘By listing, the CIU must comply with rules made by the FSA in its capacity as UK Listing Authority.
Where it is listed as a ‘closed-ended investment fund’, it will satisfy the ‘sole objective’ criterion,
but only if this is to invest wholly or mainly in securities. On the other hand, there may be
instances where a CIU is listed other than as a closed-ended investment fund, but nevertheless
satisfies all the conditions for its management to be exempt.
EU-wide minimum standards of regulation apply to those CIU whose shares are traded on a
regulated market. These concern the detail to be provided to investors in the CIU prospectus and
other disclosure requirements. Currently, the only regulated markets in the UK are the main
London Stock Exchange (LSE), the PLUS trading platform for listed securities and SWX Europe
(formerly Virt-x, a London exchange for certain Swiss companies). Other markets operated by the
LSE, e.g. AIM are not regulated markets.
