Further news on VAT-exempt fund management
Last week we reported on the forthcoming change to the rules on charging VAT for fund management services. HMRC have now issued a clarifying notice to assist any taxpayer who may be thinking of making a backdated repayment claim under these rules.
The rule change followed a judgment from the European Court of Justice (ECJ) which found that member states were at liberty to make VAT-exempt a wider category of funds than the UK currently recognises. UK law currently makes certain open-ended investment funds VAT-exempt, whereas the ECJ judgment concluded that closed-ended investment funds (i.e. funds with fixed capital and numbers of shares) also had the potential to be VAT exempt if member states wished.
The new rules will come into effect as from 1 October 2008, but in the words of HMRC:
it represents the situation as it should have been since 1 January 1990 when the exemption was first introduced.
All businesses who have accounted for VAT on fund management services which now, under the amended rules, qualify for exemption should therefore consider submitting a claim to HMRC for output tax which has been over-accounted for.
As usual, all claims are subject to a three-year backdating limit unless particular circumstances apply which disapplies that limit – as found in the recent House of Lords decisions in the cases of Michael Fleming (t/a Bodycraft) v HMRC (Fleming) and Condé Nast Publications Ltd v HMRC (Condé Nast).
Within the context of their claim, business should be able to produce evidence of their VAT accounting, and all claims should be for all prescribed accounting periods in which the error occurred. HMRC warn that any claimant not claiming for all affected accounting periods is liable to have amounts owed for those periods offset against any successful claim. The usual rules about rejection of a claim if repayment would result in “unjust enrichment” also apply.