knowledge | 16 November 2020 |
VAT on Payments for Management Services Provided to Pension Funds
On 8 October 2020, the European Court of Justice (“ECJ”) delivered its judgment in United Biscuits (Pension Trustees) Limited v HMRC1, in which it considered the correct interpretation of Article 135(1)(a) of Directive 2006/112/EC (the “Directive”) in the context of VAT on the supply of management services to pension funds. This judgment is on foot of an opinion concerning the classification for VAT exemption purposes of investment management services supplied to the trustees of an occupational pension scheme.2
The ECJ has considered VAT on services provided to pension funds on numerous occasions and in different factual circumstances. In particular, the Court has provided guidance on the extent to which employers can recover VAT on taxable third-party services provided to pension funds and the relevant criteria that must be satisfied in this regard.
Recoverability of VAT on management services to pension fund
The ECJ ruled in the PPG Holdings case3 that an employer who has set up a pension fund for the benefit of their employees is entitled to VAT deductions paid on services relating to the management and operation of that fund. This entitlement is contingent on the existence of a direct and immediate link between the particular input transaction and taxable output transaction, in other words, a direct and immediate link between the services provided and the employer’s economic activity as a whole. On the facts of this case, the ECJ found that there was such a direct and immediate link as the exclusive reason for the employer’s acquisition of the services was within the scope of their taxable activities. In setting up the pension fund, the employer was complying with a legal obligation and therefore the costs of acquiring management and administration services for the pension fund formed part of the employer’s general costs, from which VAT could be deducted.
As a consequence of the PPG Holdings decision, the Revenue Commissioners (“Revenue”) published a document revising their position in relation to the deductibility of VAT incurred by an employer in setting up and managing a pension fund.4 Previously, Revenue had accepted that “the setting-up, administration and on-going management of a pension fund is part of an employer’s business and VAT incurred on expenses in connection with these activities are deductible to the extent that the employer is engaged in taxable activities”. Revenue extended these activities to include services for the management of a pension fund’s assets in light of PPG Holdings, subject to certain conditions being satisfied. These conditions reflect and include the direct and immediate link requirement set out by the ECJ. Additionally, Revenue stipulated that the costs incurred must be invoiced to, and paid by, the employer and not passed on to the pension fund.
An employer is not entitled to VAT deductions on the costs of fund-related services where these costs are reimbursed by the pension fund as they cannot be considered part of the employer’s overheads. Similarly, employers who receive taxable services and make an onward supply to the pension fund for consideration must charge VAT on this supply.
Pension fund services and Article 135(1)(a) VAT exemption
Article 135(1)(a) of the Directive provides for an exemption from VAT for “insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents”.5 The question referred to the ECJ for consideration was whether supplies of management services to pension funds by insurers and/or non-insurers are “insurance transactions” for the purposes of the above exemption. The Court held that the services in this case did not satisfy the necessary criteria to be classified as an insurance transaction. The absence of provision of any indemnity of risk was crucial in this regard. Accordingly, the Article 135(1)(a) VAT exemption could not be availed of.
From this decision and the preceding opinion, it is clear that the VAT exemption must be interpreted in the context of the particular transaction and what will be considered is the nature of the contractual relationship, not the status of the parties. For instance, the fact that the service provider is an insurer or non-insurer will not be determinative of the existence of an insurance transaction.
What does this mean?
When considering whether a transaction is an “insurance transaction” for VAT exemption purposes, the ECJ made it clear that a strict interpretation of Article 135(1) is required and an exclusion of any indemnity from risk would appear to preclude the transaction in question from availing of the exemption. Additionally, it should be noted from the AG’s opinion that transactions that are closely linked, but ancillary to insurance transactions, by virtue of the First Life Assurance Directive also do not qualify for the VAT exemption as this would be contrary to its objective.
What can we do?
VAT on services to pension funds remains a complex area to navigate. Please contact a member of the Employment, Pensions and Incentives Group or Tax Teams at McCann FitzGerald who can assist organisations with any further queries in relation to VAT on services provided to pension schemes or any other issues addressed in this briefing.
Also contributed by India McGirr.
- Case C-235/19, United Biscuits (Pension Trustees) Limited and another v Commissioners for Her Majesty’s Revenue and Customs, 8 October 2020. For a copy of the judgment, please see here.
- Case C-235/19, United Biscuits (Pension Trustees) Limited and another v Commissioners for Her Majesty’s Revenue and Customs, Opinion of Advocate General Pikamäe, 14 May 2020. For a copy of the opinion, please see here.
- Case C-26/12, Fiscale eenheid PPG Holdings BV cs te Hoogezand v Inspecteur van de Belastingdienst/Noord/kantoor Groningen, 18 July 2013. For a copy of the judgment, please see here.
- A copy of this publication is available here.
- Article 135(1)(a) Council Directive 2006/112/EC of 28 November 2006, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32006L0112&from=SK.
This briefing is for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.