The current Finance Bill extends the range of financial services which are defined as VAT- exempt supplies.
Financial services supplied in connection with a wide range of funds will be VAT-exempt as a result of a provision in the current Finance Bill, expected to become law in the course of July. Some fund management services are already exempt, but a European Court of Justice (ECJ) judgement has prompted a change in domestic legislation to widen this category.
The provision, for which HMRC has just published guidance, follows on an ECJ judgment in which ruled on how member states could define the “special investment funds” which were exempt from VAT. Under current UK law, three types of fund are exempt: authorised unit trust schemes (AUTS), open-ended investment companies (OEICs) and trust-based schemes (TBS). The last type is now largely an archaic category and will be removed from the VAT-exemption category as at 1 October 2008. The first two types are both open-ended collective investment schemes (i.e. they have variable capital and the number of shares in issue fluctuates as new shares are issued to new investors and existing investors cash in.)
The significance of the ECJ judgment is that the term “special investment funds” was found to be capable of includingclosed-ended investment funds, such as investment trust companies (i.e. funds with fixed capital and numbers of shares). This does not, of course, in itself place any obligation on the UK to include such funds within its definition of the special investment funds which are to be exempt. However, the judgment also stated that member states had to give regards to the purpose of the VAT-exemption and the principle of fiscal neutrality in deciding which funds should belong in the exempt category. The purpose of the exemption is to facilitate investment, in particular through equality of treatment across funds.
In accordance with the judgment taken as a whole, supplies of management services on closed-ended collective investment funds will be VAT-exempt as from 1 October 2008. These include UK investment trust companies, venture capital trusts, and also similar offshore investment funds whose shares are available for investment by the UK general public under the same conditions.
HMRC’s guidance notes also include a useful reminder of the meaning of the “management” that is VAT-exempt. This is defined as “the management charge or fee which is normally deducted from the assets in the [fund] periodically.” Some legal services associated with, and essential to, the running of the fund may nevertheless not be VAT-exempt – a given example is solicitors’ drafting fees on legal documents essential to the operation of the fund.