Following on from our February E-bulletin, the CJEU has now issued its decision in the Danish case of ATP Pension Service A/S1 concerning the recoverability of VAT in the context of defined contribution schemes. As we remarked at the time, this decision has much wider implications for the UK pensions industry given the now mandatory auto-enrolment regime.

Summary

ATP is a provider of services to PensionDanmark, an occupational pension fund. PensionDanmark administers pensions schemes established on behalf of a large number of private and public undertakings in Denmark.

ATP's principal function is to establish a pension scheme when requested by an employer. Each employer informs ATP of the pension contributions are payable for its employees and transfers over a single amount equivalent to the total sum of those contributions to the financial institution holding the pension account. ATP is responsible for then allocating the appropriate amounts to each employee's individual pension account. Once paid in, ATP tracks the balance of each employee's account, as well as processing credits and debits, initiating withdrawals and directing the financial institution to make payments.

Referral to the ECJ

Up until 2002 ATP paid VAT on the payment received from pension funds for the services it provided. However, following the CJEU's decision in SDC2, ATP considered that payments into and disbursements from pension funds represented transactions concerning "payments or transfers" which were exempt from VAT under Article 13B (3) of the Sixth Directive3:

"Without prejudice to Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse:

(d) the following transactions:

3. transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection and factoring;

.....

6. management of special investment funds as defined by Member States."

(the "VAT Exemption")

Whilst the Danish Tax Ministry agreed with ATP that disbursements from a pension fund were not subject to VAT, the Ministry did not accept that payments into a retirement benefits scheme fell within the VAT Exemption. The case went up through the Danish courts until the Eastern Danish High Court referred the matter to the CJEU for a preliminary ruling.

Questions

On referral, the Danish High Court asked the CJEU four questions:

  1. Could a pension fund constitute a "special investment fund" for the purposes of the VAT exemption
  2. If a pension fund did constitute a "special investment fund", did "management" cover the services that ATP was providing to PensionDanmark
  3. Were ATP's services to be regarded as a single service or as separate services which were to be assessed independently for the purposes of the VAT Exemption
  4. Whether pension payments would be covered by the VAT Exemption

Judgment

In answer to the first question, the CJEU noted that the wording of the VAT Exemption conferred upon the Member States the task of defining the meaning of "special investment funds". However this did not mean that Member States could pick and choose between funds and designate some as falling within and others outside the VAT Exemption.

In the CJEU's view, pension funds could fall within the definition of "special investment funds" where they were funded by the persons to whom the retirement benefit was to be paid, where the savings were invested using a risk-spreading principle and where the employees bore the investment risk. It was irrelevant that the contributions were paid by the employer or that the amounts paid were based on collective agreements between labour-market organisations. Further irrelevant factors in the CJEU's opinion included the fact that there might be different ways of paying out the savings invested, that contributions were deductible under income tax law or the presence of any insurance element in the benefits.

As to the second question, the CJEU considered that services by which an undertaking established the rights of pension customers in relation to pension funds through the opening of accounts in the pension scheme system and the crediting to such accounts of the contributions paid would constitute "management of special investment funds" and fall within the VAT Exemption. The term "management" would also extend to the provision of accounting services and account information services.

In considering the third and fourth questions together, the CJEU explained that the issue was really whether the service of paying contributions into a pension fund could be seen as constituting a payment or a transfer for the purposes of the VAT Exemption. Previous CJEU case law had established that a transfer was a transaction consisting of the execution of an order for the transfer of a sum of money from one bank account to another. Further, a transfer could also be characterised by both a change in the underlying legal and financial situation of the transferor and the transferee and between those parties and their respective banks (and potentially even between the parties' banks themselves). A transfer could occur even if the transfer was simply a transfer between two accounts belonging to the same account holder, provided there was a change to the underlying terms and conditions by which the assets were held.

In the case the CJEU left it to the National Court to determine which of ATP's services fell within the VAT Exemption and whether those services could be considered as so closely linked as to form a single indivisible service which could not be split.

Comments

Although most UK defined contribution schemes are VAT exempt by virtue of being formed through insurance contracts and insurers providing the services, the ATP decision offers guidance as to how services which a defined contribution scheme chooses to outsource might be treated from a VAT perspective. The decision clearly indicates that outsourced services are likely to be considered on an individual basis with the clear risk that some services may not fall within the VAT Exemption.

Finally, it is worth noting that in response to the earlier decision in PPG4 (covered in our September 2013 E-bulletin), HMRC has now withdrawn Notice 700/17 which dealt with the reclaiming of VAT in relation to funded pension scheme arrangements. We anticipate further developments in this area.

Footnotes

1 Case C-464/12

2 Case C-2/95 SDC [1997] ECR I-3017

3 Sixth Council Directive 77/388/EEC

4 Fiscal eenheid PPG Holdings BV v. Inspecteur van de Belastingdienst (Case C-26/12)

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.