UK: UK VAT Exemption For Fund Management Services

Last Updated: 19 November 2008

Changes to the scope of UK VAT exemption for fund management came into force on 1 October 2008.

HM Revenue & Customs (HMRC) introduced changes to the scope of the UK VAT exemption for fund management following the European Court of Justice (ECJ) judgment in JPMorgan Fleming Claverhouse Investment Trust plc (JPMC). This article considers some of the implications for the industry.

Last year, the ECJ held that fund management services supplied to investment trust companies (ITCs) should be exempt from VAT. It ruled that the restrictive treatment applied by the UK was in breach of the principal of fiscal neutrality. From this it was clear that other similar forms of investment vehicle should also benefit from the VAT exemption.

To comply with the decision, the UK exemption for fund management has been amended by Statutory Instrument 2008/1892, which came into effect on 1 October 2008. The scope of the VAT exemption will now be extended to include the following.

  • Funds similar to open-ended investment companies (OEICS) and UK authorised unit trusts (AUTs).
  • Other collective investment undertakings – although, in order for the exemption to apply:

    • he sole object must be investment of capital, raised from the public, wholly or mainly in securities
    • assets must be managed on the principle of spreading investment risk
    • all ordinary shares (of each class if there is more than one) or equivalent units must be included in the official list maintained by the Financial Services Authority (FSA) pursuant to section 74(1) of the Financial Services and Markets Act 2000
    • all ordinary shares (of each class if there is more than one) or equivalent units must be admitted to trading on a regulated market situated or operating in the UK.

The exemption will also apply to foreign equivalents of the funds, such as Dublinbased OEICS and Luxembourg Société D'investissement À Capital Váriable (SICAVs) that are managed from the UK.

HMRC has issued Business Brief 48/08 to clarify the legislation. The key points to note are as follows:

  • HMRC has acknowledged that the sub-funds listed on the FSA register do not necessarily correspond to the sub-funds that are marketed in the UK. It has therefore provided a list of other factors (such as 'distributor status') that should be considered in deciding whether the management of a sub-fund falls within the exemption
  • there is now a de minimis provision which requires a fund (or sub-fund) falling within the new classification of those funds attracting VAT exemption, that is not 'for the time being' marketed to UK investors, to be treated as not within the VAT exemption categories, where either:

    • less than 5% of its shares or units are held overseas by UK investors, or
    • where that fund has never been marketed in the UK.

The expanded guidance note also provides more information on how the new legislation affects the recovery of input tax.

Impact Of The Changes

Retrospective claims

By now, most fund managers will have lodged retrospective claims with HMRC to recover overpaid output tax. But a number of issues have arisen with regard to the backdating of these claims. The recent Condé Nast case established that the UK law to cap claims by three years was defective when first introduced in 1997, as no adequate transition period was provided for. As a result, fund managers are now entitled to file claims dating back more than three years, although we understand that HMRC is taking a rather aggressive line.

First, HMRC needs to be satisfied that the fund managers will not be 'unjustly enriched'. They are unlikely to approve claims unless it can be demonstrated that monies will be passed to the original customer, which is not unreasonable.

HMRC also requires that the claims submitted by fund managers be reduced to allow for input tax recovered previously.

Again, this is not unreasonable, but HMRC has also insisted on a further reduction in input tax which the ITC may have already recovered.

However, HMRC has been accused of acting unlawfully in this regard, since this requires one taxpayer to reduce his/her claim to allow for VAT that HMRC is unable to recover from another taxpayer. This could result in further litigation action.

Input Tax Restriction

To date, fund managers have been entitled to recover input tax (and not charge output tax) in respect of funds located outside the UK. This is on the basis that providing fund management services to a similar fund in the UK would be taxable. The new rules mean that where a fund is covered by the VAT exemption, the VAT recovery on related costs will need to be restricted. This will impact on a fund manager's cost base as the irrecoverable VAT cost will increase.

From a VAT compliance perspective, many fund managers will become partially exempt for the first time and will therefore need to negotiate a partial exemption special method. As a result of the change in business status from taxable to partially exempt, HMRC may be slow in approving the new methods.

Umbrella Funds

With respect to 'umbrella funds' such as SICAVs established in Luxembourg, HMRC requires that the VAT exemption be applied at sub-fund level, i.e. it is not the management of the SICAV, but the management of the SICAV's 'recognised' sub-funds that are exempt. However, there are likely to be practical difficulties in establishing which sub-funds are affected.

Pension Fund Management

Finally, it should be noted that the VAT treatment of pension fund management is also under review. A new case yet to be heard by the Tribunal will test whether the principles of the JPMC decision can be used to bring pension funds within the definition of 'special investment funds', and thus within the VAT exemption. If successful, this case could also have a retrospective effect, creating more work but also significant opportunities for those involved in this sector.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions