UK: Pension Schemes And Investment Management: Developments In VAT

UK pension schemes are currently charged VAT on investment management fees when they invest using segregated rather than pooled funds. However, since the European Court’s decision in the JP Morgan case (click here to view previous LawNow ), there has been much discussion about whether this position in the UK is compatible with EU law. There are also important proposals from the European Commission which, if implemented, will certainly change the VAT landscape over the next few years.

Case law developments: JP Morgan

HM Revenue & Customs claim that the JP Morgan case (which related to a particular type of pooled investment) has no relevance to pension schemes and insist that VAT is charged to pension schemes on segregated investment management fees. However, at a seminar hosted recently by CMS Cameron McKenna, HMRC announced that two pension schemes (through their fund managers) are appealing against HMRC’s position on this issue.

Now that an appeal is in process, it is possible for fund managers of other pension schemes to submit a "protective" claim for recovery of VAT. If the appeals against HMRC’s position are successful, meaning that VAT should not have been charged on investment management fees, a protective claim allows a scheme to recover VAT back to three years before the date of the protective claim.

Pension schemes which currently have segregated investments in European securities, or other financial instruments, or have had such investments within the past three years, are recommended to contact their fund manager to discuss what action the manager is taking on this issue and whether this issue is sufficiently material to justify making a protective claim.

On 28th November 2007 the European Commission issued proposals for a Council Directive and Regulation concerning the VAT treatment of financial services and insurance. Please visit the EUROPA website for more details. The new proposals would include "mutual and pension funds" as collective investment undertakings. If adopted, the exemption from VAT would apply for investment and administration management for pension funds, probably from 2010.

We are holding a VATCHAT on 6th December 2007 in London and 7th December in Edinburgh, where these issues will be discussed in more detail, with representation from HM Treasury and the European Commission. For more information click here

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 30/11/2007.