ATP PensionService: VAT on pension services

The CJEU has concluded that the VAT exemption for the management of special investment funds can apply to the management of a pension scheme, where the investment risk is borne by the pension customer, such as in a defined contribution scheme. The court also commented on what services provided fell within the concept of "management".

ATP provides administration services to a pension fund

ATP provides the following services to an occupational pension fund that administers a number of occupational pension schemes:

• administrative tasks, such as the provision of information and specific advice to employers and employees (pension customers) in relation to the retirement schemes provided;
• system maintenance and development in relation to the platform from which ATP provides its services to pension funds; and
• services related to payments into, and disbursements from, pension funds.

The Danish taxing authority refused to treat these services as exempt from VAT on the grounds that pension funds differ sufficiently from special investment funds. However, the ECJ found that none of the differences cited by the authorities were relevant to the question of the exemption.

Essential characteristic of a special investment funds

The ECJ began by setting out the objective of exempting transactions connected with the management of special investment funds; that is to facilitate investment in securities through investment undertakings by excluding the cost of VAT and ensuring that VAT is neutral as regards the choice between direct investments in securities and investments through collective undertakings.

It therefore considered whether or not a defined contribution scheme displays similar characteristics to UCITS (undertakings for collective investment in transferable securities) which are considered "special investment funds", or display characteristics which are sufficiently comparable to be in competition with them.

The court found that the essential characteristic of a special investment fund is the pooling of assets by several beneficiaries, enabling the risk borne to be spread over a range of securities. The pension schemes in issue were funded by the pension customers who, in the court's view, bore the investment risk, a feature of defined contribution schemes.

This contrasted with the Wheels case, in which the members of the scheme did not bear the risk arising from the management of the investment fund in which the scheme's assets were pooled because the pension was a defined benefit rather than a defined contribution scheme (the investor would always receive a particular amount, defined by reference to the duration of his employment and level of remuneration).

Certain factors are not relevant

The court also set out a number of factors that it did not consider to be relevant in understanding whether a fund was a special investment fund:

• whether or not the employer pays the contributions on behalf of employees. The contributions are still "funded" by the employee because the contributions are paid on their behalf using funds which must "be regarded as reverting to them as a result of their work";
• the amount paid into the pension fund is based on collective agreements between labour market organisations. This does not alter the fact that the contribution is paid by the employee, or at least in his name and on his behalf, and that he benefits from the proceeds and bears the risk of his investment;
• that the employee has the option of making additional contributions;
• that the fund accumulated may be paid out as a lump sum or in instalments after the employee reaches pensionable age. These options merely reflect different ways of calculating the amount to be paid out;
• that contributions are deductible from an income tax perspective under income tax law. National income tax legislation should not inform the interpretation of the exemptions from VAT under EU law; and
• an insurance element is added, and that element is ancillary to the principal supply.

Accordingly, the court held that pension funds, such as those in question, may fall within the provision if they are funded by the persons to whom the retirement benefit is to be paid, if the savings are invested using a risk-spreading principle, and if the employee bears the investment risk. That effectively dealt with the principal question in favour of the taxpayer.

Additional comments

Whether or not ATP was providing services which constituted management was remitted back to the national court to decide in line with EU principles. However, the court felt it needed to make some comments on this matter. In particular, it stated that:

• such services must form a distinct whole and be specific to, and essential for, the management of special investment funds;
• management services includes those services listed under the heading "Administration" in Annex II to Directive 85/611, but that list is not exhaustive; and
• examples of such services are computing income and the price of units or shares, the valuation of assets, accounting, the preparation of statements for the distribution of income, the provision of information and documentation for periodic accounts and for tax, statistical and VAT returns, and the preparation of income forecasts.

In other words, the sort of services that were being provided by ATP.

The case is undoubtedly good news for such pension funds on all fronts. Managers of such funds will now need to consider carefully their contractual and VAT position.

ATP PensionService A/S -v- Skatteministeriet [2014] EUECJ C-464/12

Please click on the links below for the other articles in the March 2014 tax newsletter.

• Budget 2014
• CGT for non-residents disposing of UK residential property
• Perrin: source interest
• Forde: employer payments to third parties
• Solvency II - recognition of deferred tax assets
• Flanagan: tax avoidance and tradingflanagan-tax-avoidance-and-trading