THE TREASURY HAS RELEASED DRAFT LEGISLATION, the Value Added Tax (Finance) Order 2008 (the Order), which extends the VAT exemption for fund managers to cover UK-listed investment entities and certain overseas funds. The Order, which comes into force on 1 October 2008, varies Group 5 of Schedule 9 (exempt financial services) to the Value Added Tax Act (VATA) 1994 and clarifies the scope of the Group. It is expected that fund managers and providers of fund administration services will be affected by the revised rules.
BACKGROUND
The changes made by the Order arose as a consequence of the judgment of the European Court of Justice in JP Morgan Fleming Claverhouse Trust plc and the Association of Investment Trust Companies v The Commissioners of HM Revenue and Customs [2007]. The case was concerned with the treatment of VAT charged on fees relating to the management of investment trusts. Prior to the ECJ’s ruling, fees associated with the management of assets of investment trusts were subject to VAT at the standard rate. The ECJ determined that investment trusts are investment funds comparable to authorised unit trust schemes (AUTs) and open-ended investment companies (OEICs), and accordingly fell within the definition of ‘special investment funds’.
The government announced in the 2008 Budget (please refer to BN74) that the current legislation would be amended to ensure that the UK legislation is consistent with EC law.
CURRENT LAW
Article 135(1)(g) of the Principal VAT Directive (Council Directive 2006/112/EC) requires member states to exempt the management of special investment funds as defined by the member states in question. This law has been incorporated in UK legislation by items 9 and 10, Group 5 of Schedule 9 to VATA 1994. Group 5 describes the financial services that are exempt from VAT and exempts the management of certain categories of investment funds. Until 30 September 2008, items 9 and 10 of Group 5 defined the following funds for the purposes of the exemption:
- AUTs;
- OEICs; and
- trust-based schemes (TBSs).
AUTs and OEICs are UK open-ended collective investment schemes, regulated by the Financial Services Authority as authorised investment funds (AIFs). TBSs are single-property schemes and none have been authorised in recent years.
The amendments set out in Article 2 of the Order, which only apply to supplies made on or after 1 October 2008, redefine the investment funds whose management falls within the ambit of the exemption by substituting items 9 and 10 and amending certain of the related notes.
The new items 9 and 10 retain the management of AUTs and OEICs but omit TBSs. They also expand the current rules by exempting the management of certain new categories of funds.
VAT EXEMPTION FOR THE MANAGEMENT OF OPEN-ENDED COLLECTIVE INVESTMENT SCHEMES
Item 9 and the Notes to Group 5 (amended from 1 October 2008) set out the open-ended funds to which the exemption applies. In summary, these are collective investment schemes that are:
- all UK-established AUTS and OEICs; or
- recognised overseas schemes
Recognised overseas schemes fall into three basic categories:
- Collective investment schemes (CISs) established elsewhere in the European Economic Area, which are compliant in their own member state and where notification has been given to the FSA of the intention to market the units to UK investors. This category will also cover schemes established in Gibraltar.
- CISs established in Guernsey, Jersey, the Isle of Man and Bermuda, which have similar regulation to UK CISs and have been recognised by the FSA so that their units can be marketed to UK investors.
- CISs established elsewhere, which have similar regulation to a UK CIS and have been given an individual recognition order by the FSA so that their units can be marketed to UK investors.
VAT EXEMPTION FOR THE MANAGEMENT OF CLOSED-ENDED COLLECTIVE INVESTMENT UNDERTAKINGS
Item 10 and the Notes to Group 5 exempt the management of a closed-ended collective investment undertaking (CIU) provided that the CIU satisfies certain conditions relating to:
- its investment objective;
- its UK listing status (ie, the shares or equivalent units must be listed in the UK Official List and comply with the rules made by the FSA in its capacity as UK Listing Authority); and
- trading of its shares or equivalent units on a regulated market.
If the CIU satisfies the above three conditions, it will qualify for the exemption regardless of where it is established.
IMPLICATIONS
The changes to the legislation and expansion of the VAT exemption to include investment trust companies was expected on the basis that the UK’s exclusion of investment funds from the VAT exemption was in contrast to the principle of fiscal neutrality and the objectives of European law. Furthermore, the government had also clearly announced in the 2008 Budget that the VAT exemption for fund management would be extended. The revised legislation should result in significant cost savings for investment funds that qualify for exemption under the new rules, on the basis that no VAT will be imposed on any management services provided.
However, the revised rules will have an adverse impact on providers of fund management services. These providers generally incur certain expenses, such as legal and accounting fees, valuation fees and other costs in providing a single composite supply of fund management services. These providers will not be able to recover the input tax incurred on any expenditure associated with the supply of fund management services.
By Ian Reid, associate, Jones Day. E-mail: ireid@jonesday.com.