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Significant recent changes in tax law: United Kingdom

    • Tax planning and consultancy - Briefings


    Recovery of VAT on management services provided to a pension fund

    On 18 July 2012, the Court of Justice of the European Union (CJEU) issued its judgment in the Dutch reference: Case C-26/12 PPG Holdings BV.  Contrary to the Opinion of the Advocate General, the Court held that VAT charged on fund management services provided to a pension fund could be deducted by an employer which had established a pension fund for its employees, provided that the employer could establish the usual link between the VAT costs incurred and the employer’s economic activities as a whole.

    This represents a major change for the UK VAT treatment of pension fund managers’ costs. Hitherto, if  a VAT registered employer set up a pension fund for its employees under a trust deed, the VAT incurred in both setting up the fund and on its day-to-day management was treated by the UK tax authority (HMRC) as recoverable input tax by the employer.  HMRC has applied this treatment even where responsibility for the general management of the scheme rests (under the trust deed) with the trustee, or the trustees pay for the services supplied. However, HMRC has not permitted the employer to recover the VAT on investment activity costs, which makes up the majority of the fund managers’ fees.  As a simplification measure HMRC permitted employers who received a single invoice from fund managers for both management and investment activity to recover 30% of the VAT on the invoice as a proxy for the  management activity of the fund manager.  This treatment was widely adopted in the UK market.

    In order to defend this position, that 70% of the cost was not recoverable, the UK intervened in the PPG case and made both written and oral submissions.  The UK argued that because the fund was legally and fiscally separate from the trading business, PPG could not recover the VAT paid on investment activity costs since those inputs were used by the fund rather than the employer business.  The Advocate General agreed with this approach.  She also agreed with the UK’s submission that VAT incurred by the employer in setting up the pension fund, enrolling employees in the fund, ensuring that its own contributions are made timeously, and so on could be recovered as input tax by the employer (i.e. the costs of managing the administration of the fund). 

    The CJEU took a different approach and held that a taxable employer which has set up a pension fund in the form of a legally and fiscally separate entity, is entitled to deduct the VAT it has paid on services relating to the management and operation of that fund, provided that the usual test for input tax recovery is satisfied; that is to say that there is a direct and immediate link between the input costs and the taxable transaction of the employer.

    HMRC has said that it will issue guidance to taxpayers in the light of PPG. It is understood that HMRC will pay claims that certain employers have already made and we eagerly await the detail of HMRC’s position.  There is a significant opportunity for employers with pension funds to review the VAT recovery position of fund managers’ costs. In PPG the CJEU was clear that costs relating to both management and investment activity were recoverable (subject to the usual VAT recovery rules).  It is important therefore to review the VAT treatment of pension fund managers’ costs in other EU member states to see if the local treatment is in line with PPG. If it is not there may be an opportunity to make retrospective claims for under claimed input tax.

    Final consumers given direct rights to recover unlawfully levied VAT from HMRC

    The English High Court has ruled that EU law requires end consumers to be given directly effective rights to recover unlawfully levied VAT from HMRC in circumstances where those end consumers have paid VAT on invoices from suppliers but have not directly accounted for overpaid VAT to HMRC (Investment Trust Companies (in Liquidation) v HMRC [2012] EWHC 458 (Ch)).

    In Case C-363/05 JP Morgan Fleming Claverhouse Investment Trust plc, The Association of Investment Trust Companies v HMRC, the CJEU held that the management fees charged to investment trust companies (ITCs) should be exempt from VAT in accordance with the former Article 13B(d)(6) of the Sixth VAT Directive.  Prior to this judgment, the UK had treated management fees chargeable to ITCs as subject to VAT.  Many fund managers made claims directly to HMRC for the unlawfully levied VAT, who in turn repaid this VAT to ITCs which had made claims against them.  For various reasons connected with limitation periods and insolvency of some fund managers, certain ITCs were not able to recover the VAT directly from managers.  However, the High Court has held, subject to limitation periods, that in the light of Case C-94/10 Danfoss A/S, Sauer-Danfoss ApS v Skattmnistreit, EU law requires the claimants to be given a direct remedy to recover the unlawfully levied VAT directly from HMRC because it had proved impossible or excessively difficult for them to recover the VAT from suppliers.

    Although this litigation is on-going in the UK, it is clear that EU law does require the tax authorities to repay unduly levied VAT in certain circumstances where it is impossible or excessively difficult for the end consumer to recover it directly from the supplier.  Opportunities of this nature may arise in other EU member states where, as in the Claverhouse litigation, national law levies VAT on supplies in breach of EU law.

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