Supplies of pension fund management not exempt insurance

UPDATE
For the opinion of the AG on referral to the ECJ, see AG opines that pension fund management is not exempt insurance.

The High Court has rejected the application by the trustees of the United Biscuits pension funds for restitution of VAT paid in relation to pension fund management services provided by non-insurers: United Biscuits (Pension Trustees) Ltd v HMRC [2017] EWHC 2895. The court rejected the contention that supplies of fund management services to a pension fund constituted a supply of insurance or, in the alternative, that supplies by non-insurers of such services should benefit from exemption due to the operation of the principle of fiscal neutrality.

In addition, the court held that, following the Investment Trust Companies case, the Pension Trustees would have had no right to direct reimbursement from HMRC of VAT overpaid to fund managers even if such supplies had been exempt.

The case was originally brought on the basis, at least partly, of the differential treatment of supplies of pension fund management by insurers and non-insurers. However, it should be noted that HMRC have since announced that they will no longer treat supplies of pension fund management by insurers as an exempt supply of insurance with effect from a date in 2018 (yet to be determined). See “Withdrawal of VAT insurance exemption for pension fund management provided by insurers”.

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 has 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”.

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.

Insurance exemption

Article 135(1)(a) of the PVD exempts "insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents."

The United Biscuits Pension Trustees argued 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 the First Life Directive differentiated between "kinds of insurance" and "other operations", with pension fund management falling within the latter category.

The judge, Warren J, had no doubt that pension fund management did not fall within the meaning of “insurance” for the purposes of the exemption in the PVD. The judge undertook a lengthy consideration of a number of VAT cases, including Card Protection Plan, Skandia and Aspiro. In particular, it was clear from the definition of insurance transaction adopted by the ECJ in Card Protection Plan that “the essentials of an insurance transaction are… that the insurer undertakes, in return for prior payment of a premium, to provide the insured, in the event of materialisation of the risk covered, with the service agreed”.

As a general proposition, the judge accepted that it may be that there is no reason to interpret the term insurance differently depending on whether it appears in the Directives on insurance or the VAT Directives, but that proposition should not be taken too far. As such, the judge rejected the contention that the insurance directives included in their scope, as insurance, other transactions that did not amount to insurance. As regards the inclusion of pension fund management in the First Life Directive, the judge concluded that it was not within the definition of “direct insurance” and had only been included to bring such activity, when carried on by an insurer, within their regulated activities along with their main business. The inference drawn by the judge was that the activity of management of pension funds does not, of itself, amount to insurance.

In conclusion, the judge was in no doubt that pension fund management could not be regarded as “insurance” for the purposes of the PVD. The matter was acte clair and the judge rejected the claimants’ application to have the matter referred to the ECJ.

Fiscal neutrality

Warren J has also rejected the Pension Trustees arguments that HMRC were required by the principle of fiscal neutrality to treat the supplies of pension fund management by non-insurers as exempt from VAT. Having determined that the management of pension funds does not fall within Article 135(1)(a), there was, essentially, no basis on which a claim for fiscal neutrality could be based.

First, it should be noted that to the extent that pension fund management came within the scope of the insurance directives, it was only when carried out by insurers and certainly not when carried out by non-insurers. Second, if anything, consistency in treatment should be achieved by denying exemption to insurers.

Furthermore, there was no basis to apply the principle of fiscal neutrality simply because HMRC allowed supplies by insurers to be treated as exempt, in practice. The scope of the exemption is governed exclusively by EU law and, if a Member State wrongly affords exemption to one supplier as a matter of domestic law or practice, another supplier cannot rely on fiscal neutrality to obtain the same treatment.

Availability of a remedy against HMRC

The decision on the scope of the insurance exemption and fiscal neutrality was enough to dismiss the appeal, however the judge went onto to consider whether, if he was wrong on those issues, the Pension Trustees would have been able to recover overpaid VAT directly from HMRC.

In particular, in the Investment Trust Companies decision, the Supreme Court recently held that that the principle of unjust enrichment does not provide a customer with a general restitutionary right to repayment of overpaid VAT directly from HMRC and that, even if there were such a right, the statutory scheme of recovery in VATA 1994 section 80 was intended by Parliament to be exhaustive and, as such, would exclude any such right, unless recovery from the supplier is impossible or excessively difficult.

Nevertheless, the United Biscuits Pension Trustees argued that their claims were materially different both factually and legally from the claims brought in the Investment Tax Companies case, such that recovery from the investment fund managers would have been impossible or excessively difficult.

Firstly, the claimants argued that they had no domestic cause of action against the suppliers in circumstances where the money had been payable in accordance with the terms of the relevant investment management agreements and had been accounted for to HMRC in accordance with the VAT Act.‎ In particular, the contracts in question provided for VAT to be payable “if applicable” and the claimants argued (it seems) that VAT was applicable simply because it was charged. Unsurprisingly, the judge rejected that contention out-of-hand. If the supplies in this case had fallen within the exemption, VAT would not have been “applicable” under the contracts.

Secondly, the claimants argued that there was no mistake in this case since the payments of VAT were made in accordance with the domestic law as it stood. Unless and until non-insurers invoked their directly effective rights to exempt treatment, there was no mistake. Again, the judge rejected this argument. The fact that the mistake was a mistake as to the requirements of EU law did not mean the payments were not made under a mistake. If the supplies had been properly exempt within the PVD, then there would have been a mistake as to whether the contract obliged the Pension Trustees to pay VAT.

As such, the judge concluded that the Pension Trustees would have had a restitutionary claim against the non-insurer suppliers of management services, had such services been correctly treated as exempt.

The claimants argued, nevertheless, that recovery against the suppliers in this case would, unlike in the ITC case, have been impossible or excessively difficult because the VAT status of the supplies in this case was in dispute. In contrast, HMRC argued that the merits of the claim against the supplier are irrelevant and have no bearing on the question. On this point, the judge again rejected the claimants arguments, concluding that any difficulties in interpreting the VAT Directives did not give rise to circumstances rendering claims against non-insurer suppliers impossible or excessively difficult. (Perhaps surprisingly, however, the judge did not necessarily accept that the circumstances which could render a claim impossible or excessively difficult cannot ever relate to the merits of the claim, as proposed by HMRC.)

Comment

Whilst the decision contains a lengthy and dense consideration of the nature of the concept of insurance in both the insurance and VAT Directives, ultimately the decision is a relatively simple one. Insurance involves the acceptance of risk and pension fund management does not fall within such a concept of insurance.

Given the lengthy treatment of the primary question, it is perhaps slightly surprising that the judge spent relatively little time on the question of the scope of the principle of fiscal neutrality. However, HMRC’s acceptance that their treatment of supplies of pension fund management by insurers was contrary to EU law essentially scuppered this particular argument. It should be noted that HMRC has now revised its published policy to reflect its position that insurers should not benefit from exemption going forward, see “Withdrawal of VAT insurance exemption for pension fund management provided by insurers”.

Finally, in the light of the Supreme Court’s decision in ITC case, it was in many ways surprising that the United Biscuits case actually reached court. The arguments seeking to distinguish the position of the Pension Trustees from the position of the Investment Trust Companies seemed particularly weak and it is not clear why HMRC did not seek to strike out the claim for lack of cause. Perhaps, HMRC considered that it would be useful for the Court to give a decision on the scope of the Article 135(1)(a) exemption? If so, then HMRC’s decision appears to have succeeded.