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The VAT briefing for April 2013

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Key developments this month include the following: in Wheels, the CJEU held that defined benefit occupational pension schemes are not special investment funds; in Commission v Ireland, the CJEU confirmed that non-taxable persons may join a VAT group; in GfBk, the CJEU held that the supply of investment advisory services to special investment funds may be exempt pursuant to the fund management exemption; and in ITC, the High Court held that mistake-based restitutionary claims against HMRC are available to claimants who have borne the economic burden of wrongly charged VAT and are unable to recover those amounts from their suppliers.

Wheels: management of pension schemes

The CJEU has given its judgment in Wheels Common Investment Fund Trustees (C-424/11), holding that investment funds in which the assets of defined benefit (DB) occupational pension schemes are pooled do not constitute special investment funds (SIFs) for the purposes of the fund management exemption in art 135(1)(g) of the Principal VAT Directive.

The CJEU noted that Member States have the power to define the meaning of SIFs in compliance with both the objectives pursued by the VAT Directive and the principle of fiscal neutrality. It held that investment funds pooling DB scheme assets are not collective investment undertakings within the meaning of the UCITS Directive, because they are not open to the public and constitute employment-related benefits granted by employers solely to their employees. Nor are such funds sufficiently comparable to be in competition with UCITS funds, as:

  • members do not bear risk arising from the management of the funds given that the benefit is defined in advance on the basis of length of service and salary level (rather than being based on investment performance); and
  • employers are not in the same position as investors in UCITS fund, as they are only complying with their legal obligations towards employees when they pay contributions into pension schemes.

Why it matters: This case confirms HMRC’s view that management services provided to DB pension funds are taxable and may be influential in the outcome of the EU financial services review (where the treatment of pension funds is a key outstanding issue). The position of defined contribution schemes remains unclear, however, as the members of such schemes do bear the risk arising from performance of the fund, although they are still not comparable to normal investment funds from an employer perspective. This issue is due to be decided by the CJEU in the case of ATP PensionService A/S (C-464/12).

Commission v Ireland: VAT grouping infraction proceedings

The CJEU has followed the opinion of the Advocate General (AG) in European Commission v Ireland (C-85/11) (see ‘The VAT briefing for January’, Tax Journal, dated 18 January 2013). The Commission brought infraction proceedings before the CJEU against the UK, Ireland, the Czech Republic, Denmark, Finland and the Netherlands, arguing that the VAT grouping rules in those Member States infringed EU law because they allowed non-taxable persons (i.e. persons not carrying on an economic activity, such as passive holding companies and dormant companies) to join VAT groups.

The CJEU held that the EU legislature did not intend to exclude non-taxable persons from membership of a VAT group. The intention was that Member States should not be obliged to treat persons separately for VAT purposes where their independence was purely a legal formality, and the inclusion of non-taxable persons in a VAT group could contribute to the objectives of administrative simplification and the prevention of certain abuses.

Why it matters: While this judgment applies to the case against Ireland, it is expected that the CJEU will come to the same conclusion in the cases against the UK (C-86/11, judgment due on 25 April) and other Member States. The UK should therefore not have to amend its rules allowing holding companies (often non-taxable persons) to join VAT groups and consequently recover input VAT. It should also lead to more consistent treatment of VAT groups throughout the EU.

GfBk: outsourced investment advisory services

The CJEU has given its judgment in GfBk Gesellschaft für Börsenkommunikation (C-275/11) in relation to the applicability of the fund management exemption in what is now art 135(1)(g) of the Principal VAT Directive to the supply of investment advisory services provided by a German investment advisor, GfBk, to the manager of a German SIF. While the manager could accept or decline GfBk’s recommendations for the sale and purchase of assets, in practice, it almost always accepted such recommendations.

The CJEU applied the test in Abbey National that, for the fund management exemption to apply, the services performed by a third party must, viewed broadly, form a distinct whole and be specific to, and essential for, the management of a SIF. It held that this requirement would be satisfied where the third party advisory services are intrinsically connected to the activity characteristic of a fund manager, which would be the case where the services consist of giving recommendations to a manager to purchase and sell assets. It was irrelevant for these purposes that advisory services are not listed in Annex II to the UCITS Directive (as the list is not exhaustive) and also that the services did not alter the fund’s legal and financial position. The CJEU held further that its decision was supported by the principle of fiscal neutrality, as otherwise managers would be disadvantaged by outsourcing investment advisory work.

Why it matters: This case is important in the funds context, as it confirms that the organisational structure of management functions should not have adverse VAT implications. By widening the scope of the exemption, it may reduce VAT costs for some SIFs, although investment advisers may suffer increased irrecoverable input VAT. There are still, however, some questions which have been left unanswered, not least to what extent the principles discussed in this case can extend to other outsourced services, or to investment advice where in practice the manager exercises a higher degree of discretion.

Budget 2013

In a quiet budget for VAT, the highlight was the announcement of future consultations on proposed changes. It is proposed that manufacturers will be entitled to reduce their VAT payments to take account of refunds they make directly to final customers, for example in cases of faulty or damaged products; this will be introduced in Finance Bill 2014. There will also be a consultation on secondary legislation for the zero-rating of certain supplies of goods destined for export outside the EU. The changes will treat sales to persons who are UK VAT registered but have no UK business establishment as zero-rated where they arrange for the export of goods outside the EU. UK law currently applies VAT to such transactions, contrary to EU law. The proposed extension of VAT exemption to for-profit entities providing university level education will be consulted on again, after responses to the first consultation identified significant concerns with the options proposed.

ITC: restitutionary claims against HMRC

The High Court has released a further judgment in Investment Trust Companies (in liquidation) v HMRC [2013] EWHC 665 (Ch). The claimants are investment trust companies (ITCs) which were wrongly charged VAT on supplies of investment management services by their managers. The managers recovered the overpaid VAT from HMRC under VATA 1994 s 80 to the maximum extent permitted and repaid this to the ITCs. The case concerns whether the ITCs are able to bring common law restitutionary claims against HMRC to recover the part of the overpaid VAT they were not able to recover from the managers.

In a preliminary judgment in March 2012, the High Court held, as a matter of EU law, that the ITCs were entitled to a direct remedy against HMRC for some of these amounts of overpaid VAT, because they had borne the economic burden of the VAT and could not recover it from the managers (see our article ‘The VAT briefing for March’, Tax Journal, dated 8 March 2012). There are two types of restitutionary claims in this context: a so-called Woolwich claim for restitution of tax unlawfully demanded, and a mistake-based restitutionary claim (which benefits from a longer limitation period). Even though the claimants had brought their claims in restitution, the court considered that HMRC should be entitled to limitation defences analogous to those which would apply to claims by the managers under s 80 (i.e. now a four-year cap). However, it deferred its decision on which domestic restitutionary remedies were available, pending the judgments of the Supreme Court in the FII GLO and the CJEU in Littlewoods, which were given last year.

In its latest judgment, the court held that a Woolwich claim was only available to persons who were directly liable for the overpaid tax, and not to persons (like the ITCs) who had borne the economic burden of the tax through the imposition of a contractual obligation. This meant that the more generous mistake-based restitutionary claim was available to the ITCs. The court ruled that if it was wrong on this point, then the claimants had the right to choose between the available restitutionary remedies.

Why it matters: ITC is of wide-ranging application, and, if correct, suggests that any person who has been wrongly charged VAT and is unable to recover all that VAT from their supplier may be able to bring a restitutionary claim against HMRC. However, it seems almost inevitable that HMRC will appeal this judgment.

The holding that mistake-based claims are available is advantageous to claimants, particularly if the High Court is wrong that HMRC should be entitled to a limitation defence equivalent to that applicable under s 80.

What to look out for

  • The AG’s opinion in PPG Holdings on VAT recovery in relation to pension funds, released on 18 April.
  • Release of the VAT consultations announced in the Budget (referred to above).
  • Volkswagen Financial Services (on VAT recovery in relation to hire purchase transactions) is due to be heard by the Court of Appeal in October.

Lee Squires and Fiona Bantock are senior associates in the Hogan Lovells tax group

Editor’s note: A recent development not mentioned above is the Supreme Court's decision in HMRC v Aimia Coalition Loyalty UK Ltd (formerly known as Loyalty Management UK Ltd) (the authors’ firm acted for the taxpayer in this case). An article reviewing the judgment will be published shortly.