A recent Upper Tribunal (UT) case involving Intelligent Money Ltd (IM) v HM Revenue & Customs (HMRC) highlighted the importance for businesses operating self-invested personal pension schemes (SIPPs) to seek advice and support on the scope of VAT exemption.
The UT’s decision has confirmed that fees in connection with the provision, operation and administration of SIPPs were not consideration for exempt supplies of insurance. The UT upheld the decision of the First-tier Tribunal,  UKFTT 0338 (TC), although for reasons that differed on some aspects.
The IM SIPP seeks to provide a member with a tax efficient means of saving for a pension, over which they have control of the investments made. The member assumes the risk of investment performance and has to make decisions regarding the nature and timing of benefits taken. IM charged an annual fee of £150 for the provision, establishment and ongoing operation of the member’s pension plan. IM argued that its annual fees were consideration for exempt supplies of ‘insurance transactions’ within the meaning of Group 2 of Schedule 9 to the VAT Act 1994.
The UT confirmed that, by reference to the Court of Justice of the European Union (CJEU) case law, the essential features of an insurance transaction 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 considered the assumption of risk and held that someone other than the insured person must bear the cost of the payment, or the provision of the service that is provided on the materialisation of that risk or uncertainty. In IM’s case, this requirement cannot be satisfied where the cost of the payment or the provision of the service, being the provision of the death and life benefits, falls on the insured person (the member of the SIPP) through the member’s fund.
The UT also stated that even if the insurance exemption can extend to some life insurance contracts with an investment element, a distinction has to be made between certain cases. One where the premiums become ‘owned’ by the insurance company and the cost of the payment 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 funds held for the benefit of the insured person and/or other beneficiaries.
The above case highlights the complexities of identifying the underlying supply to determine whether VAT exemption applies. It reaffirms that, in order for the insurance VAT exemption to apply, the supplier must bear some level of risk. As highlighted in the original FTT decision, it casts doubts on the reliability of HMRC’s guidance and manuals, acting as reminder that this guidance isn’t law (unless it’s given the force of law under specific provisions) but only HMRC’s interpretation of the law. This interpretation is not always shared by the courts, and businesses should be careful when relying on HMRC’s guidance.
We work with a variety of businesses on complex VAT matters. If you have any queries relating to this case or any of the issues raised, please get in touch with either of our VAT Directors, Callum Richards and John Butterfield.