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VAT: Investment trusts
On 28 June 2007, the European Court of Justice (ECJ) ruled on the VAT treatment of management services to UK investment trusts.
Current UK VAT legislation limits the scope of an exemption from VAT to the management of:
- an authorised unit trust scheme (AUT) or of a trust based scheme; and
- the scheme property of an open-ended investment company (OEIC).
The management of other types of investment vehicles (including investment trust companies (ITCs)) is subject to VAT.
This means that when a fund manager charges an AUT or an OEIC for its services it does not charge VAT. However, when a fund manager supplies similar services to an ITC, VAT must be charged.
Claverhouse (an ITC) challenged the validity of this aspect of UK VAT legislation. In the 10 years ending on 31 December 2003, it had paid £2.7 million in non-recoverable VAT on management services.
The ECJ’s decision indicated that, in applying the EC VAT Directive, the UK might have drawn its VAT exemption too narrowly.
The effect for ITCs
If the UK VAT and Duties Tribunal agrees with the ECJ’s decision, this will mean that ITCs should not pay (or historically, have paid) VAT on management fees. (But it is possible to reclaim only 3 years of overpaid VAT).
And for pension schemes
As the ECJ steered clear of extending its conclusions beyond the types of fund specifically identified in the case a test case is needed to ascertain the effect (if any) of the ruling on pension schemes.
In May 2008, Wheels Common Investment Fund (WCIF) and the National Association of Pension Funds (NAPF) agreed that they would jointly bring a legal challenge against HM Revenue & Customs (HMRC) on the application of VAT on the investment management services supplied to occupational pension funds. WCIF is an £8 billion multi-employer scheme covering Ford Motor Company Limited, Jaguar Cars Limited and Land Rover.
In February 2011, a VAT Tribunal hearing decided that the ECJ should interpret the scope and meaning of the exemption and decide if it should be extended to pension schemes. We understand that HRMC and WCIF have agreed on the questions to be submitted to the ECJ and that the case is likely to be heard in mid-2012.
The beneficiaries of a successful challenge would mainly be private sector defined benefit pension schemes with segregated investments.
Author: Georgina Jones