The change follows acknowledgement that a series of long running challenges to the VAT treatment of pension fund management services have now concluded, and EU law on the issue is settled.

HMRC says it is now clear that there will be no further review of the EU rules in this area before the UK exits the EU. In light of this, the policy of allowing insurers to treat their supplies of non- special investment fund (SIF) pension fund management services as VAT exempt insurance is to be discontinued.

Following representations from insurance industry stakeholders, this policy change will apply from 1 April 2019.

HMRC policy has previously allowed all pension fund management services provided by regulated insurance companies to be exempt from VAT. This treatment arises from the UK’s original application of the insurance exemption to all of an insurer’s regulated insurance activities, including the management of pension funds.

Following the Court of Justice of the European Union (CJEU) judgment in Card Protection Plan (CPP), UK law was amended from 1 January 2005 to remove any link between an insurer’s regulatory status and the entitlement to VAT exemption on its supplies. The judgment makes it clear that the EU insurance exemption applies only to the underwriting of risk and does not apply to other supplies made by insurers.

However, UK policy continued to allow insurers to exempt their supplies of pension fund management services. 

Since then, this treatment has been reviewed regularly and maintained, reflecting the ongoing uncertainty concerning the current and future treatment of pension fund management services.

Initially this uncertainty arose from the EU Commission’s review of the VAT treatment of financial services which began in 2006, and which created an expectation that it would result in a future exemption for all pension fund management services. However, after several years of discussion, the EU Commission withdrew its proposal in its 2016 Work Programme, as no agreement appeared likely. Continuing CJEU litigation in this area has created further uncertainty.

Then, in ATP Pension Services (C-464/12) (ATP), the CJEU found that a pension fund which pooled investments from a number of defined contribution occupational pension schemes qualified as a SIF for the purposes of the VAT exemption for fund management services.

This case specifically concerned defined contribution (otherwise known as money purchase) pensions and did not concern the VAT treatment of services supplied in connection with defined benefit pensions. Services supplied in connection with defined benefit pensions schemes were found by the CJEU in Wheels Common Investment Fund Trustees and Others (C-424/11) to fall outside the fund management exemption on the basis that the investment fund (which pools the assets of such a scheme) was not a SIF.

Prior to the judgment in ATP, HMRC did not consider pension funds of any kind to be SIFs, and therefore treated services provided in connection with all types of pension fund as falling outside the specific VAT exemption for the management of SIFs.

In light of the ATP judgment, HMRC now accepts that pension funds that have all of the required characteristics are SIFs for the purposes of the fund management exemption, so that the services of managing and administering those funds are, and always have been, exempt from VAT. Pension funds that do not have all those characteristics are not SIFs and so do not come within the scope of the exemption.

HMRC understands, however, that the great majority of pension fund management services provided by insurers are supplied for defined contribution pension funds and therefore qualify (and have always qualified) for exemption as SIFs following the judgement in ATP.

Further information: Revenue and Customs Brief 3 (2017): VAT - treatment of pension fund management services

Report by Pat Sweet