VAT exemption widens for fund management? JP Morgan and review of financial services

In the UK VAT exemption for fund management is currently restricted to authorised unit trusts and open-ended investment companies as regulated under the “UCITS’ regimes. The same scope applies in many EU countries, although in some it extends to pension funds e.g. Germany and Italy, and others to closed ended funds e.g. Ireland and Luxembourg.

The judgment of the European Court of Justice (“ECJ”) in the case of JP Morgan dated 28 June 2007 now stands to widen that exemption. Possibly of equal or even greater importance however, is the potential outcome of the European Commission review on the application of VAT to financial services, in particular funds, within the EU.

JP Morgan Fleming Claverhouse Trust

In a reference from the London Tribunal, The JP Morgan Fleming Claverhouse Investment Trust and the Association of Investment Trust Companies challenged the refusal of HM Revenue and Customs to exempt the fund management services supplied to investment trust companies.

The finding of the ECJ was that closed-ended funds can be included in special investment funds, and whilst member states do have a discretion, closed ended funds can be included in the definition of “special investment funds”. The purpose of the exemption from VAT for fund management is to facilitate investment in securities by investment undertakings without the addition of VAT, so that the position should be VAT neutral as between direct investment in securities and investment through collective undertakings. Distortion would occur if similar supplies of goods and services be treated differently, so that supplies of services in competition with each other to attract funds must be afforded the same VAT treatment.

HMRC’ issued Revenue and Customs Brief 58/07 on 22nd August 2007. This states that the matter will now be remitted to the Tribunal for further review of the case.

Proposlas for a revised directive and regulation on the VAT treatment of financial services

Aligned with, and possibly of more real importance, the European Commission are proposing to redraft the VAT directives and introduce a new interpretative regulation, concerning the VAT treatment of financial services, including funds, with a view to implementation by 1 January 2010. There is a further proposal to permit a right of option to taxation, with a planned implementation date of 1 January 2012.

Draft Directive. A new proposed Article 135(1) (f) to Directive 2006/112/EC proposes to exempt “Management services for investment funds”. A new Article 135a 1(6) proposes to define ":"Investment funds" and a new Article 135a1 (7) proposes to define management services" . Also exempted would be Article 135.1.(g ) “Intermediaton in insurance and financial services”, and Article 135.2 “Related services…..” A new draft Article 137a requires that “Member States shall allow taxable persons a right of option for taxation for the services referred to in points (a) to (g) in article 135(1) .

Draft Regulation accompanying draft Directive. In addition, a proposed Regulation (an instrument "laying down implementing measures") is also being put forward. This method is being adopted because a Regulation, unlike a Directive, is directly applicable ( ie already the law in each member state without the need for transposing provisions into national law) . The draft Regulation describes a wide variety of investment funds as eligible for the exemption, where they consist of "services generating unit ownership in undertakings for collective investment" and in turn as falling within the definition of "supply of securities" under the Directive. Such funds are described as including open-ended funds, exchange traded funds, closed ended funds, mutual funds, pension funds, hedge funds and real estate investment funds. The regulation then goes into extensive detail as to the activities that will constitute “management services” and what is excluded generally from exemption.

Exemption going forwards ?

It appears, therefore, that if the Directive and Regulation are taken forward in their current form, pension funds may become exempt from paying VAT on investment management services in future, unless the option to tax is exercised. But there is a two year interim period at the moment. The issue of how, when and what to opt for taxation will also need to be considered. But there are still holes in the proposals, for example why are “related services” excluded from the right to opt for taxation?

There are a lot of issues in play going forwards. For more information, please contact:

TAX
Peter Mason [email protected]
Richard Croker [email protected]
Mike Boutell [email protected]
Steven Sieff [email protected]

PENSIONS
Keith Webster [email protected]
Kieron Mitchinson [email protected]

FINANCE
Paul Edmondson [email protected]
Simon Morris [email protected]