United Biscuits: High Court rejects claims for refunds of overpaid VAT
In United Biscuits (Pension Trustees) Ltd and another v HMRC  EWHC 2895 (Ch), the High Court has held that pension fund management services by non-insurers are standard rated and dismissed the claimants' claims to recover VAT on investment management services for pensions.Background
The claimants were United Biscuits (Pension Trustees) Ltd, the trustee of a defined benefits occupational pension scheme, and the former trustee of the undefined benefits Pension Investment Fund (a collective investment fund in which the assets of the scheme were invested between 1989 and 2006) (the Trustees). The Trustees submitted claims to HMRC to recover VAT which they had paid on supplies of pension fund management services to various investment managers that were not authorised insurance companies (Non-Insurers).
Under UK law, pension fund management services have always been treated by HMRC as exempt supplies when provided by insurers but as standard rated supplies when provided by Non-Insurers.
The Trustees argued that the supplies made by Non-Insurers were insurance transactions and therefore attracted a mandatory exemption from VAT. They claimed that they had a directly effective right to exemption with a consequential right to recover from HMRC the VAT which they should never have been obliged to pay.
HMRC's primary case was that the supplies by the Non-Insurers were not insurance transactions within the meaning of the VAT Directives and did not attract exemption under those Directives. In HMRC's view, the supplies were standard rated and VAT was correctly paid in accordance with UK law. If that was not the case, HMRC argued that the Trustees had no right to recover directly from HMRC the VAT which was paid to the Non-Insurers.
High Court decision
The Trustees' claims were dismissed.
The following two issues fell to be considered by the Court:
1. whether supplies by Non-Insurers were to be treated as exempt supplies of "insurance"; and
2. if the Non-Insurers supplies should have been exempt, whether EU law required the Trustees to be given a direct claim against HMRC to recover the VAT they had overpaid to the Non-Insurers.
On the first issue, the Court was of the view that pension fund management services were not "insurance transactions" within the meaning of Article 135(1)(a), Principal VAT Directive (2006/112/EC). Such services were not regarded by the insurance Directives as insurance when carried out by a Non-Insurer. In addition, the principle of fiscal neutrality did not require the services to be treated as if they were "insurance transactions". The supplies were therefore properly standard rated.
With regard to the second issue (which only arose if the Court was wrong on the first issue), relying on EU and English case law, the Court said that the Trustees' remedy would have been against the supplier, not HMRC. In reaching this conclusion, the Court applied the Supreme Court's decision in Investment Trust Companies v HMRC  UKSC 29. There were two separate payments that could not be conflated and it could not be said that HMRC had been unjustly enriched at the expense of the Trustees. Under section 80, VATA 1994, the customer could not seek direct recovery from HMRC unless recovery from the Non-Insurer was impossible, or excessively difficult and in the view of the Court it was not "impossible or excessively difficult" for the Trustees to claim against the Non-Insurers.
The Court went on to consider what remedy the Trustees would have if it was wrong in the conclusions it had reached on the first and second issue. In such circumstances, the Court said that the Trustees would have a remedy against HMRC. However, the time limit for such a claim would be four years (rather than six years under the Limitation Act 1980) in accordance with the time limits for reimbursement set out in section 80, VATA 1994. In the Court's view, such an approach was entirely consistent with EU law.
The debate between HMRC and pension funds over whether management services provided to pension funds are taxable or exempt for VAT purposes has been running for over 10 years. During that time the CJEU has had cause to consider the issue on two occasions, first in Wheels C-424/11 and then again in ATP C-464/12. It is not known whether this decision is to be appealed, but subject to any successful appeal the decision represents the law .
Given the large amounts at stake, an appeal to the Court of Appeal would not be surprising. It is, however, worth bearing in mind that this issue is now largely of historic interest as HMRC announced the withdrawal of its long established policy of allowing exemption for pension fund management services provided by insurers in Revenue & Customs Brief 3 (2017).
A copy of the judgment is available to view here.