Background

IML provides services in connection with the provision, operation and administration of a self-invested personal pension scheme known as the IM SIPP. 

IML accounted for VAT on the services it provided to members of the SIPP until 2014. However, IML claimed that the services were in fact exempt from VAT as "insurance transactions" under item 1 Group 2 Schedule 9 of VATA 1994 and that it was therefore entitled to a VAT repayment.

The decision

The UT agreed with the FTT that the essential features of an "insurance transaction" for VAT purposes, as derived from the CJEU case law, are that the insurer undertakes, in return for prior payment of a premium, to provide the insured, in the event of the materialisation of the risk covered, with the service agreed when the contract was concluded.

The UT also agreed that it is a necessary implication of the essential features of an insurance transaction that, under the contractual relationship between the insured person and the insurer, the insured obtains some protection from the relevant risk or uncertainty. Someone other than the insured person must bear the cost of the payment or the provision of the relevant service on the materialisation of that risk or uncertainty.

Applying these criteria to the facts of the case, the UT found that the supplies made by IML in connection with the provision of the IML SIPP did not fall within the VAT exemption for insurance transactions. The UT rejected IML's arguments that the annual fees and other charges paid by the members of the IML SIPP, and to an extent the contributions made by the members to the funds, constituted "premiums" paid for the provision of the life and death benefits under the scheme.

The UT held that:

• the contributions were not consideration for any supply made by IML, and that the fees and charges were paid for specific ongoing services provided by IML, and not for the coverage of any risk;
• IML did not undertake to provide the life and death benefits under any relevant binding contractual obligation with the members of the IML SIPP, and that the benefits were paid out of the members' own funds, in which IML had no beneficial interest;
• the members of the IML SIPP did not obtain any protection from the relevant risk or uncertainty, which was the occurrence of the event in relation to which the benefits were paid, and that IML did not bear the cost of the provision of those benefits; and
• even if the insurance exemption can extend to some life insurance contracts with an investment element, a distinction has to be made between cases where the premiums become owned by the insurance company and the cost of the benefits is made out of the insurance company's own resources (even if the amount payable is notionally determined by reference to the value of underlying investments) and a case in which the premiums remain substantially owned by the insured person and the benefits are paid out of these funds (as in the case of IML).

The UT also commented on the fact that the FTT in Winterthur (LON/96/1787), a case which concerned similar facts as the one at hand, came to the opposite conclusion. The UT concluded that Winterthur had been wrongly decided, as shown by subsequent CJEU decisions.

Concluding thoughts

The UT's decision confirms that the VAT exemption for insurance transactions is to be interpreted strictly and in accordance with the CJEU case law, and that the domestic non-VAT case law on the meaning of insurance is not determinative for this purpose.

The VAT treatment of pensions and life products has been the subject of discussion and debate for many years and has taken a prominent position in discussions concerning HM Treasury’s ongoing consultation on the fund management VAT consultation. While it appears unlikely that this decision will influence that consultation significantly in and of itself, the frequency with which the courts and tribunals have been asked to decide the VAT treatment of such products emphasises the need for a level playing field governed by clear rules.