UK: VAT - Should Investment Trust Management Be Exempt From VAT?

Last Updated: 25 July 2007

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 get in touch.

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.

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