UK: Weekly Tax Update - Tuesday 30 August 2011

Last Updated: 6 September 2011
Article by Richard Mannion

1. Private Clients

1.1 Agreement with Switzerland to "secure billions in unpaid tax"

The Government has initialled an agreement with Switzerland with the aim of tackling offshore tax evasion and is expected to secure billions of pounds of unpaid tax for the UK exchequer from 2013.

It is expected to be formally signed in the coming months. It will then go through Parliamentary and administrative procedures before being signed later in the year. The full text will be published at the time of signature.

Accounts held by individual UK taxpayers in Switzerland will be subject to a one-off deduction in 2013, of between 19% and 34%, as long as the account was open on 31 December 2010 and is open on 31 May 2013. This deduction is to "settle income tax, capital gains tax, inheritance tax and VAT liabilities in relation to the funds in the account". The deduction will not be applied if the account holder instructs the bank to disclose details of the account to HMRC. Following that disclosure, HMRC will seek unpaid taxes with relevant interest and penalties.

From 2013, income and gains arising on investments held by individual UK taxpayers in Swiss banks will be subject to a new withholding tax of 48% on investment income and 27% on gains. Again, the withholding tax will not apply if the account holder authorises disclosure of details of income and gains to HMRC and pays any associated taxes here.

A powerful new provision will allow HMRC to discover whether an individual UK taxpayer has an account in Switzerland. This power is in addition to, and goes further than, the provisions for information exchange under the UK-Switzerland Double Taxation Agreement.

1.2 Musician's expenses: T J Moore (TC 01373)

In this case the First Tier Tribunal considered whether expenditure was incurred wholly and exclusively for the purpose of a trade.

The appellant's activities as a musician had declined and his self-employed income in 2006/07 consisted of 94% from teaching with 6% derived from other music related activities. HMRC had enquired into the return and amended it to restrict the expenses to only reflect an element with regards to expenditure incurred in relation to the music tuition.

The Tribunal found that, despite the significant fall in income, the appellant had not ceased as a musician and become a teacher. It then found that, other than the loan interest, the expenses and capital allowance claimed were incurred wholly and exclusively for the purposes of that trade. The appeal therefore, in essence, succeeded.

Discovery assessments had been raised in respect of the two prior years on the presumption that business expenditure had been overstated in those years. At the commencement of proceedings Counsel acting for HMRC conceded that the discovery assessments were unsound in the light of the decision of the Tribunal in Agnew v HMRC [2010] UKFTT 272 (TC).

1.3 Reasonable excuse: Stephen Rich (TC 01380)

This case concerned the late notification of chargeability to self assessment income tax for the 2006/07 tax year and an appeal to the First Tier Tribunal against HMRC's surcharge for late payment on the grounds of the reasonable excuse of relying on one's accountant. The taxpayer had requested his accountant to notify HMRC of his liability to tax in April 2007. The accountant notified HMRC (and included form 64-8) in April 2008. HMRC had no record of receipt of the notification or form, but only the taxpayer's notification of liability in April 2010. The Tribunal were satisfied that the accountants sent the form and that it was either lost in the post or mislaid by HMRC on receipt. In considering whether reliance on a third party can amount to reasonable excuse for the purposes of levying any surcharges for late payment, the Tribunal raised the following points:

"I find support for my view from the decision of the Special Commissioner (Adrian Shipwright) in Rowland where he said at [22 – 26]:

"The issue arises as to whether reliance on a third-party is prevented from being a reasonable excuse. For VAT purposes there is specific provision that where "reliance is placed on any other person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied on is a reasonable excuse." There is also specific provision that insufficiency of funds is not a reasonable excuse (see section 71 VATA). The legislation that I am concerned with in this case was passed after the VAT legislation but only contains a provision that insufficiency of funds is not a reasonable excuse. There is no equivalent provision that reliance on a third party is not a reasonable excuse for direct tax purposes.

Whilst in the VAT context it was thought necessary to exclude reliance on a third party as presumably otherwise it could be a reasonable excuse in the direct tax context it is, at most only a indication that reliance on a third party can be a reasonable excuse. However, I consider it a very telling indication especially as it is a limited exclusion for VAT (see Enterprise Safety Coaches notwithstanding GB Capital Ltd).

The Thorne case and Enterprise Safety Coaches are clear authority that reliance on a third party can be a reasonable excuse.

I conclude that in the direct tax context reliance on a third party can be a reasonable excuse.

The issue then becomes, did Mrs Rowland have an effective reasonable excuse? Having found that it was reasonable from Mrs Rowland to rely on her then accountants and that it was this reliance that led to the underpayment, I consider that this was an excuse for making the underpayment and as the reliance was reasonable the excuse was at first blush reasonable. Having further concluded that reliance on a third party can be a reasonable excuse I conclude that Mrs Rowland has a reasonable excuse in the particular circumstances of this case for not having paid the tax on time and had this reasonable excuse throughout the period of default."

I agree with the conclusion of the Special Commissioner in Rowland that reliance on a third party, such as the accountants in this case, can be a reasonable excuse. Like him, I find that it was reasonable for Mr Rich to rely on his accountants and that it was this reliance that led to the failure to notify his chargeability to income tax on time. This failure was the causal factor of the subsequent chain of events. Until such time as HMRC had received that notice, no UTR could be issued. The experience of the accountants was that without a UTR, HMRC would not accept a tax return. In very short order after the UTR was issued, the relevant tax returns were filed and the tax due was paid in full."

2. Employment tax

2.1 Spotlight 12: Taxing the rewards for work carried out for a UK based employer

HMRC has added a spotlight on new tax avoidance schemes that seek to avoid Income Tax and NICs which are being advertised to contractors, highly paid employees and those using recruitment agencies.

"It is claimed that these schemes get around new disguised remuneration rules.

Arrangements may involve payments passing through a series of companies, loans from a third party or an offshore alleged employer, a deed of covenant, secondments from one employer company to another or claims of self employment, etc. In HMRC's opinion these arrangements do not succeed in avoiding the tax and NICs due. HMRC will challenge these arrangements and litigate where necessary to recover unpaid tax and NICs.

Current legislation ensures that rewards and recognition from working for UK-based businesses are charged appropriately to UK Income Tax and NICs. This legislation applies whether the rewards are routed through employee benefit trusts, employer funded retirement benefit schemes or through any other intermediaries, either as loans, transfers of assets or other payments. The legislation will also apply to such third party arrangements where an employment is disguised as self employment or a contractual arrangement.

Those intent on avoiding Income Tax and NICs by using trust arrangements should also be aware that there could be adverse Inheritance Tax (IHT) and trust tax consequences regardless of whether they themselves set up the trust. These include IHT charges when contributions are made to the trust, when funds are transferred from a trust to a sub-trust or removed from the sub-trust, when uncommercial loans are made by the trustees and at the ten year anniversary of the trust."

2.2 Disguised Remuneration - draft NIC regulations

HMRC has published draft NIC regulations for disguised remuneration and an explanatory memorandum for comment.

These regulations are to make provision for amounts chargeable to income tax under Chapter 2 of Part 7A of the ITEPA 2003 to be treated as earnings for NIC purposes if they would not already be earnings for NICs purposes. They include provision to prevent a double liability for NICs on such amounts.

Where these regulations apply ordinary NICs principles will apply to the collection of NICs. As a consequence there will be two aspects of the income tax treatment of amounts chargeable under Part 7A which will not be fully aligned with the corresponding NICs treatment:

  • Amounts deriving from duties of an employment performed overseas or with an overseas employer and chargeable to income tax on the remittance basis by virtue of sections 554Z9 or 554Z10 ITEPA will be liable to Class 1 NICs on the value of the relevant step when it is taken.
  • Amounts chargeable under Chapter 2 of Part 7A which subsequently attract income tax relief under section 554Z14 (relief where earmarking is not followed by a later relevant step) will not attract corresponding NICs relief.

3. Business tax

3.1 Business Tax Forum Minutes 27 June 2011

The minutes of the 27 June 2011 meeting between business representatives and HMRC have been made available. A summary of the points covered includes:

  • The Patent Box consultation.
  • Asset backed pension arrangements. HMRC's preferred solution to the issues raised in the consultation was option B which involves amending existing tax rules for pensions and structured finance. Option B seeks to ensure that the tax treatment of an arrangement as a whole accurately reflects the economic substance of the transaction, so that automatic upfront tax relief would only be retained for the accounting value of the 'debt instrument' and relief for those payments accounted for as interest. If the arrangement is not recognised as debt, there would be no upfront relief but relief for rental or other type of regular payments on the accruals basis would be available. Business queried the extent of the problem and whether it could be tackled by principles based legislation.
  • VAT reform in the light of the EU Green Paper. HMRC supported the broad aims set out in the Green Paper. It also supports an approach based on taxation at the place of destination, which is the effective basis for the current EU VAT system, and welcomes an examination of the current VAT system, to see if it could be made to work better, in line with those broad aims. HMRC also thought that work to successfully introduce the 2015 VAT One Stop Shop should continue to be an overall key priority of the EU. HMRC confirmed they had heard nothing further on reform of VAT on insurance transactions. Business concluded by outlining a variety of issues that they considered important within the context of the VAT system changes:
  • reduction of the administrative burden on European wide retailers;
  • cross border issues where the same product is treated differently in different territories;
  • the ability for large business to centralise their VAT process;
  • origin versus destination on taxation of goods.
  • Disguised remuneration. Business expressed concern over the complexity and the resulting difficulty in applying the legislation. They were also concerned at the length of the legislation at 70 pages and the guidance at 200 pages. There was some frustration that standard remuneration structures which are not tax motivated could be caught. It was also stated that there needed to be an assurance that the gateway would work. HMRC responded by assuring that the guidance would set out in detail how the gateway operates and that although the guidance was lengthy it would provide certainty. The guidance would provide a number of examples which should clarify whether a transaction is caught. There would also be a continuous evaluation of the policy and legislation.
  • Legislative drafting. Business commented that the current approach of catching everything and carving out exemptions was seen to create an unnecessary administrative burden and there was a suggestion that there should be a more targeted approach. HMRC agreed that it would be preferable in some circumstances to use a more principle based approach and where possible to look at targeting specific areas rather than using a blanket based approach. In many cases [HMRC considers] both approaches were considered but on some occasions encompassing everything and then carving out exemptions was the best way of ensuring that people were able to easily get out of a regime. Business commented that as well as the practical difficulties of applying very complex legislation there were also presentational difficulties of explaining complex tax issues to their Boards. HMRC agreed to give the issue further consideration. Business also stated that positively attracting business through straightforward tax legislation is a worthwhile objective and one that should be considered when developing policy.

4. VAT

4.1 HMRC response to the Reed Employment case

In March of this year the First Tier Tax Tribunal held, in the case of Reed Employment Ltd v HMRC, that an employment bureau providing temporary workers should apply VAT only to the commission element of its charges to clients, rather than the full amount invoiced (which included the worker's pay, tax and NIC). Having analysed the facts, the Tribunal found that the bureau's supplies consisted of introducing workers to its clients, rather than making a supply of staff as a principal; the amounts paid to the workers were not therefore to be regarded as 'cost components' of Reed's own supplies.

The Tribunal however went on to rule that Reed was not entitled to reclaim the VAT which it had overcharged, on the grounds that this would constitute 'unjust enrichment'. We reported in April that HMRC had decided not to appeal the decision, although this did not necessarily mean that it had accepted the Tribunal's findings.

Some five months later, HMRC has now published a Business Brief in which it states that the Reed decision was "decided on its specific facts" and that "HMRC therefore do not regard Reed as having any wider impact".

Our comment

HMRC is relying heavily on the principle that a decision of the FTT is not binding on other parties. However, in the weeks which followed the decision, it became clear that the essential facts on which the Tribunal based its decision were common to many employment businesses. Employment bureaux have been under great pressure from clients in the health care, housing association, charity and financial sectors, for whom VAT is a significant cost, to change their charging policies in line with the Reed decision, and we understand that some have already done so.

If HMRC was hoping to restrict the effect of the decision, its response has come far too late.

It is notable that the Business Brief does not suggest that the Tribunal's approach was incorrect in any way. The Tribunal made a number of important points which, in our view, are clearly applicable to other taxpayers - in particular, that:

  • the proper analysis of the nature of Reed's supply to its clients does not depend on whether Reed was acting in a particular case as principal or as agent;
  • it follows from this that the regulatory framework is not determinative;
  • it is essential to consider what the supplier is capable, as a matter of contract, of providing, and on that basis to consider what in economic reality has been supplied. "In the case of Reed, at no time did Reed exercise control over its temp workers, such that control could be ceded by Reed to its clients. The making of a supply of staff must in our view, at the least, connote a passing of control of staff from the supplier to the person receiving the supply. There is no such passing of control in this case"; and
  • "the payment which Reed makes to the temp worker [...] is not a cost component of Reed's own supply".

What should you do?

It now seems inevitable that it will take another case to resolve the issue and the position will, for months or perhaps years, remain unclear.

Employment businesses and their clients will need to keep a close watch on developments in this area. It is clear from the Reed decision, and indeed from HMRC's response, that the VAT treatment will depend on a close analysis of the facts - both the contractual terms and the commercial reality. Employment businesses who are considering changing their charging structure in line with the decision will need to think carefully about the risks and ensure that they are able to pass on, or otherwise deal with, the VAT under-charged to their clients if the final outcome favours HMRC's approach.

4.2. Barn conversion and the DIY scheme for reclaiming VAT

Ms J Wade partially succeeded in her claim to recover input VAT amounting to Ł10,729 under the DIY scheme on the conversion of a barn into a dwelling. This was because the Tribunal took a less stringent interpretation than HMRC of the reference to a building created by a residential conversion for the DIY VAT recovery provision in VATA s35(1D).

The case was complicated due to the planning application process. It was also complicated due to the fact that the barn adjoined an extension to an existing dwelling and was used for business purposes while that dwelling was occupied, before being converted (with a part of the existing dwelling) into a separate dwelling. The planning process (on the advice of an architect) was a two stage process. The first stage was an application for planning permission for the conversion of the extension to a separate dwelling. The second stage was an application for incorporation of the barn into what would then be an existing separate dwelling (assuming the conversion works took place) including any necessary changes to the external appearance of the building as a whole. The second stage application indicated the first stage conversion had been completed when in fact it had not.

HMRC argued that there were three main issues which must be considered:

  • The first is whether the barn was used as a garage in occupation with a dwelling in which event the restriction in VATA Sch8 group 5 Note (8) is engaged. Note 8 says that references to a non residential building do not include a garage occupied with a dwelling.
  • The second is whether the barn of itself created an additional dwelling. If the extension was developed into a separate dwelling in its own right HMRC considered the development failed to satisfy VATA s35 (1D) because the legislative provisions do not allow for the conversion only to create a part of the dwelling.
  • Thirdly, if the extension was not developed into a separate building in its own right then it must have remained as an extension to the main house and therefore does not satisfy the 10 year rule under VATA Sch8 group 5 Note (7A), in that it had been in use as part of a residential building immediately prior to the conversion.

On the evidence given by the appellant the Tribunal determined the barn did not meet the definition of a garage used with a dwelling.

HMRC argued firstly that if the planning consent to convert the extension into a separate dwelling was not implemented, then Ms Wade's claim was ineligible under s 35(1D) because there had not been a conversion of a non-residential part of a building into a building designed as a dwelling but only a conversion of the barn into part of a building designed as a dwelling. They also argued that under Note (7A) to Sch8 group 5, because the 10 year rule is engaged. a conversion of a non-residential building must be a building that has never been used for residential purposes in the 10 years prior to the start of the works. The extension had been in use as part of a residential building, that is the main house, immediately prior to the conversion.

HMRC submitted that if the extension remained as an extension to the original dwelling the Appellant must overcome the arguments outlined above. They argued that the question before the Tribunal was 'what was it that was converted into a dwelling to qualify as a residential conversion?' There clearly was a conversion of a barn, but according to HMRC, only into part of a building designed as a dwelling, the remainder being the existing extension. HMRC contended that on a proper construction of the legislation a conversion of a building must create a building in its own right, not a dwelling as a composite of two or more conversions. Neither the conversion of the extension nor the conversion of the barn created a dwelling in its own right, but each created part of a dwelling.

VATA s35 (1D) provides:

For the purposes of this section works constitute a residential conversion to the extent that they consist in the conversion of a non-residential building, or a non-residential part of a building, into –

a) a building designed as a dwelling or a number of dwellings;

b) a building intended for use solely for a relevant residential purpose; or

c) anything which would fall within paragraph (a) or (b) above if different parts of a building were treated as separate buildings.

The Tribunal did not agree with HMRC's interpretation of the legislation. s35 (1D). They considered it specifically envisages a situation where part of a building is non-residential and part is residential (or not nonresidential). In those circumstances it provides for works to be within the meaning of a 'residential conversion' and qualify for relief, '..... to the extent that "the works consist of the conversion of the relevant part of the building into 'a building designed as a dwelling.........".

Indeed the concept is specifically recognised in Note (9) to Sch8 Group 5, which provides that a conversion of a non-residential part of a building which already contains a residential part nonetheless qualifies for relief provided the result of the conversion is to create an additional dwelling or dwellings.

The Tribunal therefore concluded that the conversion of the barn did create an additional dwelling for the purpose of Note (9) to Sch8 Group 5, and that the conversion was within s35 (1D). However the residential conversion qualifying for the DIY VAT recovery scheme only related to the conversion of the barn and not to works done to the extension to the house. The parties were therefore instructed to agree an apportionment of the original claim.

4.3. VAT treatment of service charges in connection with a property lease

There is currently a debate over whether landlords make a single supply of a lease obligation and services to a tenant, or make two supplies being (i) the lease, and (ii) the service charge supplies. If it is possible for the latter view to prevail, it would be important to know to what lengths the landlord would have to go to create the two supply scenario.

The reason a tenant might want there to be two supplies is that in the case of a fully taxable tenant in a non opted building, under current legislation the tenant does not receive a VAT invoice from the landlord on which the tenant can recover the VAT on the services element. As a result the tenant is disadvantaged because he does effectively pay VAT albeit that the VAT is "hidden" within the value of the exempt letting supply. This issue has now reached the First Tier Tribunal which has referred questions on the issues to the European Court of Justice.

The appellants (Field Fisher Waterhouse LLP - FFW) contend on the basis of Tellmer (2009 Case C-572/07) that property services charges consisting of the supplies noted below, and supplied along with a lease of a property where the option to tax has not been made, should be viewed as two separate supplies each attracting their own VAT treatment, rather than a single indivisible supply. The supplies are:

  • repair, decoration and cleaning of the exterior and structure of the building and the common parts used by FFW;
  • maintenance, repair and renewal of machinery used in the building;
  • maintenance, repair and renewal of heating equipment;
  • lighting to the common parts;
  • supplies of hot and cold water;
  • heating to the radiators found both within the premises let to the Appellant and in the Common Parts;
  • staff for management and security of the building;
  • cleaning of the Common Parts;

FFW contend that the supplies of services are not ancillary to the supply of letting because:

i) the services are themselves unconnected to letting and do not fall within the concept of letting within Article 135;

ii) to a significant extent the services concern not the subject matter of the letting agreement but the Common Parts of the building enjoyed by persons other than the Appellant;

iii) the landlord and the Appellant could have agreed that the services be supplied by third parties direct to the Appellant rather than by the landlord;

iv) the services are separately invoiced to the Appellant.

They also contended that their case was indistinguishable from Tellmer, amongst other things because as a matter of fact the tenants in Tellmer were required under the terms of their lease to pay their landlord to provide cleaning services. However they contend that the relevant fact was that the tenants and landlord had the ability exercising their contractual freedom, to agree that the particular services could be provided in different ways.

HMRC contend that that the lease and the services in respect of which the Service Rent is charged were a single supply. This is because they formed objectively a single indivisible economic supply which it would be artificial to split. Alternatively, they contend that the services provided by the landlords were ancillary to the principal supply, being the leasing of land. HMRC also mention in connection with support for their approach, the ECJ's previous judgment in Case C-41/04 Levob [2005], which required the adoption of an economic approach to the question of whether there was a single supply, and which HMRC say has been followed in a number of cases decided since Tellmer.

HMRC contend that Tellmer is distinguishable since in that case the Court of Justice was asked to consider the single/multiple supply issue in general terms, which included cases where the lease did not oblige the landlord to carry out the cleaning and the tenant to pay the landlord for such cleaning — and indeed the Court of Justice appears to have approached the facts of the specific case involving the Tellmer company which was referred by the Czech courts on the basis that the tenants were free to conclude a separate contract for the cleaning of the common parts with a third party other than their landlord. The Order for Reference in Tellmer did not indicate to the Court of Justice whether, in Tellmer's particular case, its own tenants were required to obtain cleaning from Tellmer. However, the Czech Tax Authority ("the Financial Directorate of Usti nad Labem"), which was the Defendant in the national proceedings, submitted on page 5 of its written Observations that the cleaning contract was an independent contract concluded between Tellmer and its lessees on the basis of contractual freedom and that this did not fall within the legal content of the lease.

It was recognised that the issues were similar to those recently referred to the European Court of Justice in Purple Parking (made on 4 March 2011, Case C-117/11).

The questions referred to the ECJ in the FFW case are:-

i) The principal question in the present case is whether the services provided by landlords under a lease agreement with their tenants ("the Services") should be regarded as an element of a single exempt supply of a lease of land, either because the Services form objectively a single indivisible economic supply together with the lease or because they are "ancillary" to the lease, which forms the principal supply ("the Principal Supply"). In determining this question and in the light of the ECJ's decision in Case C-572/07 Tellmer, how relevant is it that the Services could be (but are not in fact) supplied by persons other than the landlords, albeit under the terms of the present leases in question the tenants had no choice but to receive the services from the landlords?

ii) In determining whether there is a single supply, is it relevant that a failure by the tenant to pay the service charge would entitle the landlord not only to refuse to provide the Services but also to terminate the lease agreement with the tenant?

iii) If the answer to question 1 is that the possibility of third parties providing the Services direct to the tenant is relevant, is it merely a contributory factor in determining whether the Services are either a single, indivisible economic supply, which it would be artificial to split or an ancillary supply to the Principal Supply, or is it a determining factor? If it is merely a contributory factor or if it is not relevant at all, what other factors are relevant in determining whether the Services are an ancillary supply? In particular how relevant is it whether the Services are performed in or in respect of the demised premises which are the subject matter of the letting or in other parts of the building?

iv) If the possibility of third parties providing the Services is relevant, is more particularly what is relevant

(a) whether the Services could as a legal matter be supplied by third parties, even if this would be difficult in practice to organise or agree with the landlord, or (b) the practical possibility or the common practice in the provision of such services [the relevant consideration]?

v) The Services in the present case represent a range of services provided in return for a single service charge. In the event that some of these services (e.g. cleaning of common parts, the provision of security services) are not part of a single indivisible economic supply or are to be regarded as ancillary to the Principal Supply, but other services are, would it be correct to apportion the total consideration between the various services in order to determine the portion of the consideration chargeable to tax and that portion not so chargeable? Alternatively would it be correct to regard the range of services provided as so closely linked to each other that they form "a single indivisible economic supply which it would be artificial to split" being of itself a single supply separate from the leasing of property?

4.4. VAT status of pension fund management services

The First Tier Tribunal has referred questions to the European Court of Justice in a case concerning pension fund management fees where the appellants are Wheels Common Investment Fund Trustees Ltd and others ('Wheels').

Wheels submit that, having regard to the wording and purpose of the exemption, occupational pension schemes (OPSs) fall within the definition of "special investment funds". The notion of a collective investment fund is that of a fund in which a number of persons pool their investments, and which generates a single return from a spread of investments. OPSs meet that description.

HMRC noted that the Ford Schemes (included in the dispute) are all defined benefit OPSs, so that it is only defined benefit OPSs that are the subject of the present appeals. Benefits received by the employee under a defined benefit OPS are a form of deferred pay in HMRC's view and therefore are not "special investment funds", but are fundamentally different from funds recognised by the United Kingdom as being special investment funds (VATA Sch9 "Group 5 Funds").

In HMRC's view this is because in a defined OPS such as the Ford Schemes, the amount of the benefits to which an employee is entitled depends, only, on the number of years of pensionable service and the employee's final pensionable pay. Those benefits are wholly disconnected from (a) the amount of contribution (if any) he has paid in; (b) the investment performance of the assets of the DB OPS; or (c) the management charges paid by the DB OPS. Given that disconnect between contributions (if any) and investment performance on the one hand and the amount of benefits, or deferred pay, received by the employee on the other, DB OPS cannot be regarded as a vehicle for investment by the employee.

The decision of the ECJ in C-363/05 JP Morgan Fleming Claverhouse Investment Trust Plc and another v Commissioners for HM Revenue and Customs [2007], was that the words "special investment fund" in Article 13B(d)(6) of the Sixth Directive are in principle capable of including closed-ended investment funds such as investment trust companies, so that fund management services to these entities were within the VAT exemption. However it was not considered whether this extended to pension funds.

Therefore the Tribunal has referred the following questions:

Question 1

Are the words "special investment funds" in Article 13B(d)(6) of the Sixth VAT Directive and Article 135(1)(g) of Directive 2006/112 capable of including (i) an occupational pension scheme established by an employer that is intended to provide pension benefits to employees and/or (ii) a common investment fund in which the assets of several such pension schemes are pooled for investment purposes in circumstances where, in relation to the pension schemes in question:

a) the pension benefits receivable by a member are defined in advance in the legal documents creating the scheme (by reference to a formula based on the length of the member's service with the employer and the member's salary) and not by reference to the value of the scheme assets;

b) the employer is obliged to make contributions to the scheme;

c) only employees of the employer can participate in the scheme and obtain pension benefits under it (a participant in the scheme is here referred to as a "member");

d) an employee is free to decide whether or not to be a member;

e) an employee who is a member is normally obliged to make contributions to the scheme based on a percentage of his salary;

f) the contributions of the employer and the members are pooled by the scheme trustee and are invested (generally in securities) in order to provide a fund out of which the benefits provided for in the scheme are paid to the members;

g) if the scheme assets are greater than what is required to fund the benefits provided for under the scheme, the trustee of the scheme and/or the employer may, in accordance with the terms of the scheme and relevant provisions of national law, do any one or combination of the following: (i) reduce the employer's contributions to the scheme; (ii) transfer all or a part of the benefit of the surplus to the employer; (iii) improve the benefits to members Under the scheme;

h) if the scheme assets are less than what is required to fund the benefits provided for under the scheme, the employer is normally obliged to make up the deficit and, if the employer does not, or is unable to do so, the benefits received by members are reduced;

i) the scheme permits members to make additional voluntary contributions ("AVCs") which are not held by the scheme but are transferred to a third party for investment and the provision of additional benefits based on the performance of the investment made (such arrangements are not subject to VAT);

j) members have the right to transfer their accrued benefits under the scheme (valued by reference to the actuarial value of those benefits at the time of transfer) to other pension schemes;

k) the employer's and members' contributions to the scheme are not treated for the purposes of income tax levied by the Member State as income of the members;

l) pension benefits received by members under the scheme are treated for the purposes of income tax levied by the Member State as income of the members ; and

m) the employer, and not the members of the scheme, bears the cost of charges made for the management of the scheme?

Question 2

In the light of (i) the objective of the exemption in Article 13B(d)(6) of the Sixth VAT Directive and Article 135(1)(g) of Directive 2006/112, (ii) the principle of fiscal neutrality and (iii) the circumstances set out in Question 1 above:

a) is a Member State entitled to define, in national law, the funds that fall within the concept of "special investment funds" in such a way as to exclude funds of the type referred to in Question 1 above while including collective investment undertakings as defined in Directive 85/611, as amended?

b) to what extent (if at all) are the following relevant to the question whether or not a fund of the type referred to in Question 1 above is to be identified by a Member State in its national law as a "special investment fund": (i) the features of the fund (set out in Question 1 above); (ii) the degree to which the fund is "similar to and thus in competition with" investment vehicles that have already been identified by the Member State as "special investment funds"?

Question 3

If in answer to Question 2(b)(ii) above it is relevant to determine the degree to which the fund is "similar to and thus in competition with" investment vehicles that have already been identified by the Member State as "special investment funds", is it necessary to consider the existence or extent of "competition" between the fund in question and those other investment vehicles as a separate question from the question of "similarity"?

The resolution of this case could have significance for many businesses and their pension funds which cannot recover the VAT on these management fees. However it should also be noted that under the ongoing 'EU Review of financial services' the member states seem to have agreed that the management of pension funds will in future come within the VAT exemption in any event.

4.5. Investment advisory services

A German case (ECJ case C-44/11, involving the German Supreme Court and Deutsch Bank) has recently been referred to the ECJ to consider whether 'investment advisory services' provided by a third party to a manager of a collective investment fund, can come within the definition of management of a special investment fund. The questions referred are:

1) Is the management of securities-based assets (portfolio management), where a taxable person determines for remuneration the purchase and sale of securities and implements that determination by buying and selling the securities, exempt from tax.

– Only in so far as it consists in the management of investment funds for a number of investors collectively within the meaning of Article 135(g) of Directive 2006/112/EC of 28 November 2006 on the common system of value added tax ( 1 ) or also;

– in so far as it consists in individual portfolio management for individual investors within the meaning of Article 135(1)(f) of Directive 2006/112/EC (transactions in securities or the negotiation of such transactions)?

2) For the purposes of defining principal and ancillary services, what significance is to be attached to the criterion that the ancillary service does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied, in the context of separate invoicing for the ancillary service and the fact that the ancillary service can be provided by third parties?

3) Does Article 56(1)(e) of Directive 2006/112/EC cover only the services referred to in Article 135(1)(a) to (g) of Directive 2006/112/EC or also the management of securities-based assets (portfolio management), even if that transaction is not subject to the latter provision?

The resolution of this case could have significance for businesses and individuals charged VAT who could not recover that VAT.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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