(July 19, 2015)
On July 17, 2015 the Irish Revenue published Revenue eBrief No. 73/15 “VAT & Pension Funds - Revenue's position following judgments of the CJEU”. Via the eBrief the Irish Revenue informs the public that the VAT Manual has been updated to set out the VAT treatment applying to pension funds following decisions of the Court of Justice of the European Union (CJEU) in Wheels (Case C-424/11), ATP (Case C-464/12) and PPG (Case C-26/12).
The eBrief is divided into 2 parts. The first part regards the VAT treatment of management services supplied to pension funds, whereas the second part regards the VAT deductibility in respect of pension fund costs.
VAT treatment of management services supplied to pension funds
Part 5.71 of the Irish Revenue Operational Manual: “VAT treatment of the management of a defined contribution occupational pension scheme: Revenue’s position following the decision of the Court of Justice of the European Union in ATP (Case C-464/12)”
According to Part 5.71 this manual sets out the VAT treatment of the management of a defined contribution occupational pension scheme following the decision of the Court of Justice of the European Union (CJEU) in ATP Pension Service A/S v Skatteministeriet (ATP).
In Case C-464/12 the CJEU ruled as follows:
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On a proper construction of Article 13B(d)(6) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, pension funds such as those at issue in the main proceedings may fall within the scope of that provision if they are funded by the persons to whom the retirement benefit is to be paid, if the funds are invested using a risk-spreading principle, and if the pension customers bear the investment risk. In that regard, it is of little consequence that the contributions are paid by the employer; that the amount paid in is based on collective agreements between labour‑market organisations; that there are different ways of paying out the funds invested; that contributions are deductible under income tax law; or that it is possible to add an insurance element which is ancillary to the other services provided.
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On a proper construction of Article 13B(d)(6) of Sixth Directive 77/388, the term ‘management of special investment funds’ used in that provision covers services by means of which an undertaking establishes the rights of pension customers vis-à-vis pension funds through the opening of accounts in the pension scheme system and the crediting to such accounts of the contributions paid. That term also covers accounting services and account information services such as those listed in Annex II to Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), as amended by Directives 2001/107/EC and 2001/108/EC of the European Parliament and of the Council of 21 January 2002.
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On a proper construction of Article 13B(d)(3) of Sixth Directive 77/388, the value added tax exemption laid down in that provision for transactions concerning payments and transfers covers services by means of which an undertaking establishes the rights of pension customers vis-à-vis pension funds through the creation of accounts for those customers within the pension scheme system and the crediting to those pension customers’ accounts of the contributions paid, and any transactions which are ancillary to those services or which combine with those services to form a single economic supply.
In this respect part 5.71 of the Revenue Operational Manual notes the following
Application of the CJEU decision
Revenue accepts as a consequence of the judgment that defined contribution occupational pension funds may be treated as special investment funds where each of the conditions at paragraph (2)(i) above are met. In order to ensure Irish VAT legislation complies with the judgment, Section 71(1)(c) of the Finance Act 2014 amended the VAT Consolidation Act 2010 to provide that a defined contribution scheme (within the meaning of the Pensions Act 1990) is regarded as a specified fund with effect from 1 March 2015. One-Member arrangements do not come within the scope of the exemption.
The management of defined contribution occupational pension funds are therefore exempt from VAT with effect from 1 March 2015. Pension fund mangers will no longer have an entitlement to a credit for VAT incurred on their inputs in relation to supplies to such pension schemes and input credits should be adjusted accordingly.
Retrospective application of the CJEU decision
The decision of the CJEU may be relied on by pension fund managers that have accounted for VAT on management services provided to defined contribution occupational pension schemes for past VAT periods, subject to the 4-year time limit. Adjustments should be made for any claimed inputs that related to previously taxable income.
Click here to be forwarded to the full version part 5.71 of the Irish Revenue Operational Manual as available on the website of the Irish Revenue.
Part 5.72 of the Irish Revenue Operational Manual: “VAT Treatment of the management of defined benefit pension schemes: Revenue’s position following the decision of Court of Justice of the European Union in Wheels (Case C- 424/11)”
According to Part 5.72 this manual sets out the VAT treatment of the management of a defined benefit pension scheme following the decision of the Court of Justice of the European Union (CJEU) in Wheels Common Investment Fund Trustees Ltd (Wheels).
In Case C-424/11 the CJEU ruled as follows:
“Article 13B(d)(6) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment and Article 135(1)(g) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that an investment fund pooling the assets of a retirement pension scheme is not a ‘special investment fund’ within the meaning of those provisions, management of which may be exempted from value added tax in the light of the objective of those directives and the principle of fiscal neutrality, where the members of the scheme do not bear the risk arising from the management of the fund and the contributions which the employer pays into the scheme are a means by which he complies with his legal obligations towards his employees.”
In this respect part 5.72 of the Revenue Operational Manual notes the following
Application of the CJEU decision to Ireland
The judgment in Wheels confirmed the current treatment in Ireland. Consequently, fund managers should continue to charge VAT on services to defined benefit pensions schemes. Management services are subject to VAT at the standard rate, currently 23%.
Click here to be forwarded to the full version of part 5.72 of the Irish Revenue Operational Manual as available on the website of the Irish Revenue.
VAT deductibility in respect of pension fund costs
Part 5.73 of the Irish Revenue Operational Manual: “Employer’s entitlement to deductibility of VAT incurred in the setting up and management of a pension fund for his or her employees: Revenue’s position following the decision of the Court of Justice of the European Union in PPG (Case C-26/12)”
According to Part 5.73 this manual sets out an employer's entitlement to deductibility in respect of VAT incurred in the setting up and management of a pension fund for his or her employees following the decision of the Court of Justice of the European Union (CJEU) in Fiscale eenheid PPG Holdings BV(PPG). The case concerned whether PPG was entitled to deductibility in respect of VAT incurred on services paid by it for the purpose of the pension fund it set up in order to safeguard the pension rights of its employees.
In Case C-26/12 the CJEU ruled as follows:
“Article 17 of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment must be interpreted as meaning that a taxable person who has set up a pension fund in the form of a legally and fiscally separate entity, such as that at issue in the main proceedings, in order to safeguard the pension rights of his employees and former employees, is entitled to deduct the value added tax he has paid on services relating to the management and operation of that fund, provided that the existence of a direct and immediate link is apparent from all the circumstances of the transactions in question.”
In this respect part 5.73 of the Revenue Operational Manual notes the following
Revenue position before the CJEU decision
Revenue has always accepted that the setting-up, administration and on-going management of a pension fund is part of an employer’s business and VAT incurred on expenses in connection with these activities are deductible to the extent that the employer is engaged in taxable activities. In circumstances where the employer buys in these services and incurs the VAT costs, the costs are treated as ordinary business costs provided the employer is not reimbursed by the trustees.
VAT is not deductible in circumstances where the employer’s expenses are subsequently reimbursed by the trustees of the scheme, or, where the expenses incurred relate to management of the assets of the fund. The fund itself was entitled to deductibility in respect of costs that relate to the management of the assets of the fund to the extent they are deductible. In this regard, Revenue allowed the practice of disaggregation where separately identifiable activities were engaged in by the pension manager in carrying out the management function provided certain conditions were met.
Revised Revenue position following the CJEU decision
As a consequence of the judgment Revenue accepts that the employer is entitled to deductibility in respect of costs incurred in the setting up, on-going management, administration and management of the assets of a pension scheme where the conditions set out below are met. This represents a change in Revenue practice, as previously the employer was not entitled to deduct expenses relating to the management of the assets of the fund. Due to the changes in the VAT treatment applying to expenses incurred by an employer in respect of the setting up and management of a pension fund, previous guidance in respect of disaggregation will no longer apply in these circumstances.
Conditions to be met by the taxable person:
To be entitled to deductibility a taxable person must meet the following conditions:
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the costs of the input transaction must form part of the employer’s general costs and must be, as such, components of the price of the taxable goods or services it supplies;
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the costs incurred must be invoiced to and paid by the employer and not passed on to the pension fund;
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the existence and extent of the right to deduction is determined in the light of the direct and immediate link with the employer’s economic activity and more precisely its taxable activity.
Application of the conditions:
Where the employer is reimbursed by the pension fund, the costs cannot be considered to be part of the employer’s general overheads and cannot be, as such, components of the price of the goods or services supplied. Accordingly, the employer would not be entitled to deductibility in such circumstances.
Where the employer receives taxable services and makes an onward supply of the services to the pension fund in exchange for consideration, the employer is required to charge VAT on the supplies. Where VAT is charged by the employer, it may be deductible by the trustees of the fund (to the extent that it is engaged in taxable activities).
In circumstances where the trustees of a fund contract for and receive services and are subsequently reimbursed by the employer, the employer is regarded as giving a gift or donation to the fund. Donations or gifts are not deemed to be consideration for a supply and are therefore outside the scope of VAT. Accordingly, the employer is not entitled to any deductibility in respect of the payment. The trustees may have partial recovery in respect of the expenses incurred to the extent that the fund is engaged in taxable activities.
Retrospective application of the CJEU decision
The decision of the CJEU which has direct effect may be relied on for past VAT periods, subject to the 4 year time limit.
Employers that provided pension schemes for their employees and received supplies of services in respect of the management of the assets of the fund may have an entitlement to reclaim overpaid VAT. Where disaggregation was applied, adjustments may be required for any previously claimed inputs by the employer and the trustees of the pension fund.
Click here to be forwarded to the full version part 5.73 of the Irish Revenue Operational Manual as available on the website of the Irish Revenue.
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