Should investment trust management be exempt from VAT?
The Advocate General (AG) of the European Court of Justice (ECJ) has released her opinion in the case of JP Morgan Fleming Claverhouse.
The taxpayer had argued that the management of an investment trust company (ITC) should be treated like the management of an authorised unit trust (AUT) or an Open Ended Investment Company (OEIC). Both qualify as ‘special investment funds’ and are therefore exempt from VAT. The AG, somewhat surprisingly, agreed with the taxpayer that not only could the UK have exempted such services, but that they should have always been exempt.
Article 13 B (d) (6) of the Sixth Directive exempts "the management of special investment funds as defined by Member States". This has generally been interpreted as granting each Member State the power to decide for itself which funds should benefit from the exemption. In the UK, items 9 and 10 of Group 5, Schedule 9, to the VAT Act apply the exemption only to AUTs and OEICs.
The Court was asked four questions, which the AG proposes to answer as follows (paraphrased for the sake of brevity).
1. Can an investment trust be defined as a ‘special investment fund’ for the purposes of the VAT exemption? As most of us were expecting, the AG’s answer here is yes.
2. If so, does the phrase ‘as defined by Member States’ mean that a Member State (in this case the UK) can decide for itself which funds fall within the exemption or that each Member State must identify all such funds within its territory and apply the exemption to all of them? The AG’s answer here (again, no surprise) is that each Member State has the power to decide.
3. If the Member State can select which funds benefit from the exemption, how do the principles of fiscal neutrality, equal treatment and the prevention of distortion of competition affect that discretion? The AG considers that these principles actually apply directly and restrict the UK’s discretion, to the extent that investment trusts, being in many respects similar to (and in competition with) unit trusts, should have been exempted all along. In other words, the UK has the discretion but has applied it incorrectly. If this is true, then the management of other forms of pooled investment, including pension funds, could also be affected.
4. Do the relevant exempting provisions of the Sixth Directive have direct effect? The AG’s answer here is yes, which means that (if adopted by the Court) the decision will have retrospective effect in the UK. The provisions of the Sixth Directive do have direct effect where they are sufficiently precise and unconditional, but it is surprising that this applies here given that Article 13 B (d) (6) appears to allow the Member State some discretion.
What next?
The AG’s opinion is not always followed by the ECJ, and there are some aspects of this one that will be hotly debated behind the scenes. But if the ECJ agrees, this case looks set to have very important consequences for the fund management industry. If you think your business might be affected should the exemption apply more widely, please call Martin Sharratt or your usual VAT contact.
[ JP Morgan Fleming Claverhouse Investment Trust plc/The Association of Investment Trust Companies, ECJ Opinion C-363/05]
Update on VAT for theatre production costs
HM Revenue & Customs (HMRC) appealed the High Court’s decision in Mayflower Theatre Trust, which stated that the input tax on production costs may not always be irrecoverable (see VAT Focus, November 2006). However, the Court of Appeal also found in favour of the taxpayer, although on different grounds. It agreed with HMRC that there was no direct and immediate link between the production costs and the sponsorship packages, but ruled that the production costs bore such a link to the theatre’s programme sales. As a result, the disputed input VAT is residual.
What next?
Theatres and other businesses may want to review their input tax calculation in light of the Court of Appeal’s findings and analyse carefully any taxable supplies that could be linked to the production costs.
[Mayflower Theatre Trust Ltd [2007] EWCA Civ 116]
Implementation of reverse charge accounting to combat VAT fraud
HMRC announced last year that it wanted to introduce a reverse charge procedure and a new form of sales list for businesses involved in the sale of high-value/small volume goods in order to help combat Missing Trader Intra Community (MTIC) fraud. The reverse charge accounting will take effect from 1 June 2007 and only apply to mobile phones (excluding those sold with airtime contracts) and computer chips. The de minimis limit (which applies to the total value of goods subject to the reverse charge supplied together and detailed on a single invoice) has been raised from the originally suggested £1,000 to £5,000. No anti-disaggregation provisions will be introduced, but HMRC says it will rigorously challenge any attempts to manipulate the de minimis limit.
What next?
It remains to be seen whether the reduction in scope to mobile phones and computer chips can significantly combat MTIC fraud. If your business is affected by the proposed changes and you wish to discuss them further, please call your usual Smith & Williamson VAT contact.
[HMRC Brief 24/07]
Increase in the cash accounting threshold
The annual turnover below which businesses can start to use the cash accounting scheme increased from £660,000 to £1.35m from 1 April 2007. The turnover limit above which businesses must leave the scheme also increased, from £825,000 to £1.6m. The near doubling of the threshold means that many more businesses will now be able to use the scheme. The cash accounting scheme allows VAT to be accounted for on a receipts and payments basis rather than on an accruals basis. It is particularly beneficial for businesses that suffer bad or doubtful debts or late payments from customers, as output tax does not need to be declared until payment is received.
What next?
If you think that cash accounting would be beneficial to your business, and its turnover falls within the new threshold, please speak to your usual Smith & Williamson VAT contact.
Place of supply of services global contracts
The Court of Appeal has rejected the taxpayer’s appeal in a recent case regarding the place of supply of services under a global/worldwide contract between PricewaterhouseCoopers and Zurich Insurance. The issue in dispute was whether the place of supply of services was where the services were performed, cost borne and benefit derived (which was HMRC’s argument as Zurich has a branch in the UK), or where the contract was agreed and services paid for, although recharged to the local branches (Zurich argued the place of supply was in Switzerland at its head office).
The Court of Appeal decided the former was the correct approach and that the UK branch was receiving the services which were subject to UK VAT.
What next?
Global contracts expected to deliver an overall benefit to the head office and the whole organisation, which are agreed by the head office, but relate to specific branches, should be reviewed. Companies should ensure the VAT charged on the services received and the respective input tax recovery are appropriately managed. This is of particular importance to partially exempt businesses. Please speak to your Smith & Williamson VAT contact for more information.
[Zurich Insurance Company v Revenue and Customs Commissioners [2007] EWCA Civ 218]
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.