VAT exemption with special investment funds

The European Court of Justice (ECJ) has today handed down its decision in the JP Morgan Calverhouse case.

The case centred on the interpretation by HM Customs and Excise of the VAT exemption in respect of management of special investment funds.

Although a VAT exemption currently applies to authorised unit trusts and to ICs (Open Ended Investment Companies), UK Customs and Excise levies VAT on investment trusts. The discrimination costs the shareholders of investment trusts around £30m a year, according to the Association of Investment Trust Companies.

It was argued that this discrimination in respect of VAT on investment management fees was in breach of the European Union's Sixth VAT Directive. Under this Directive special investment funds are entitled to an exemption from the VAT which would without more be payable on the costs of outsourcing their management services.

Because the Directive gives Member States a discretion as to which trusts the exemption can be applied to, the UK Government chose to interpret this as not applying to investment trusts.

The Advocate General appointed by the ECJ to this case opined recently that such ITCs should also be able to take advantage of the exemption. This was on the basis that any exclusion should be consistent with the principle of fiscal neutrality, which required that all comparable investment funds must be treated equally, including such matters as investor protection. The Advocate General's opinion is usually, but need not be, followed when the ECJ hands down its decision.

The ECJ has chosen to follow the Advocate General's opinion, and extend the exemption. Investment management services supplied to investment trust companies should now be treated as an exempt supply. VAT which has previously been charged can now be reclaimed from HMRC.

Head of Pensions at law firm Irwin Mitchell, Anne Taylor, said Investment trusts should take advice on the implications for their arrangements. It may be that substantial amounts of overpaid VAT can be recovered relatively simply."