Advocate General removes the insurance wrapper from pension fund management

The Advocate General (AG) has issued an opinion in an appeal brought by United Biscuits, which looks at the historic VAT position of investment management services for direct benefit pension funds. United Biscuits argued that management of its pension fund by non-insurers should have enjoyed the same exemption as those managed by insurers. However, the AG believes that the supply of pension fund management services is not an exempt supply of insurance at all, even when supplied by an insurer.


United Biscuits operates a defined benefit pension scheme for its employees. Between 1 January 1978 and 30 September 2013, the scheme was managed by a number of investment fund managers, including both insurers (companies authorised to conduct insurance business under the Insurance Companies Act) and non-insurers (authorised by other financial regulations to provide pension fund management services).

During the period in question, HMRC treated management of defined benefit pension funds provided by insurers as an exempt supply of insurance (known as the ‘insurance wrapper’ exemption). However, the management of those funds by non-insurers were subject to VAT. 

In 2014, the trustees lodged a claim with HMRC to recover VAT on the fees it had paid to investment managers who were not insurers.  It argued, under the principle of fiscal neutrality, that HMRC had been wrong to allow exemption for the management of a direct benefit scheme when it was provided by an insurance company when an identical service supplied by other providers was taxable. 

HMRC rejected the claim and, in the ensuing litigation, the Court of Appeal referred questions to the Court of Justice of the European Union (CJEU), asking whether pension fund management services, whether provided by an insurers or a non-insurer, were eligible for the insurance exemption in Art 135(1)a of the Principal VAT Directive.

The Advocate General’s opinion

The AG is of the opinion that these investment management services provided by insurers do not fall within the insurance exemption.

The AG believes that the exemption in Article 135(1)(a) does not cover all transactions by insurers, only those that include the following elements: a risk, a premium and the provision of a guarantee in the event of the materialisation of the risk. Subject to verification of the facts by the Court of Appeal, the AG observed that the services provided by the investment fund managers to United Biscuits do not appear to meet these criteria as they do not entail the assumption of any risk by the investment managers for consideration.

The conclusion that fund management services were not eligible for the insurance exemption at all, also meant there had been no breach of the principle of fiscal neutrality. The UK’s policy to allow insurers to exempt the service was, in the AG’s view, incorrect under EU law. Therefore, as the service should have been treated as taxable whether provided by an insurer or a non-insurer, there was no breach of fiscal neutrality. 

What this means for the UK

The ‘insurance wrapper’ exemption has since been withdrawn by HMRC - from 1 April 2019, insurers have been required to charge VAT on their supplies of non-SIF pension fund management services. Therefore, this decision is of interest to those who have made claims to HMRC in respect of historic supplies of pension fund management for direct benefit pension schemes. 

If the opinion is fully upheld by the CJEU, it is expected to settle the United Biscuits litigation in favour of HMRC, meaning that historic claims standing behind it would fail.  

The decision does not however affect direct contribution pension funds, which the CJEU has already ruled (in ATP Pension Service) to be special investment funds. Their management is therefore an exempt financial service under Article 135(1)(g) of the Principal VAT Directive. 

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