Property authorised investment funds (Property AIFs): process and effects of entry into the Property AIF regime: VAT implications
There are two main VAT implications surrounding a Property AIF when it enters the regime:
- the VAT liability of the services received from the fund manager of the Property AIF, and
- the VAT implications for the Property AIF.
VAT liability of fund management services
In most cases the fund manager will be distinct from the Property AIF, which has its own legal form as an open ended investment company, so the VAT liability of the services of managing the fund will be exempt from VAT under item 10 of group 5 to Schedule 9 of the VAT Act 1994. For further information on this point refer to VATFIN5200.
In particular, it should be noted that the VAT exemption applies only to the investment management and administration of the open-ended investment company. It does not, for example, extend to services of managing the property rental business of the fund or of property maintance, where these are outsourced. Such services will be standard-rated for VAT purposes. For further information on the liability of property services please refer to VAT notice 742: Land and property.
VAT implications for the Property AIF
Usually, the supplies made by a Property AIF will be exempt from VAT. However, where a Property AIF has a commercial property rental business it may choose to elect to waive exemption on particular properties (opt to tax) in order to claim back VAT incurred on refurbishment costs. To do this, it will need to register for VAT but once VAT registered all supplies made of the properties that have been opted will normally be liable to VAT at the standard rate. For further information on the option to tax for supplies of land and buildings please refer toVAT notice 742A: Opting to tax land and buildings and sections 22 to 24 of V1-8: Land and Property.
Also, where a Property AIF sells shares from its investment fund to a person that belongs outside the European Union it will be making ‘specified supplies’ as defined in the VAT (Input Tax)(Specified Supplies) Order 1999. Such supplies will not be liable to any VAT but if a Property AIF is not already VAT registered, it may choose to do so, in order to recover VAT on directly related costs, if the sale of shares is made by way of business. See VAT notice 706: Partial Exemption for further information.
In registering for VAT, a Property AIF is likely to be making taxable and exempt supplies (for example it could be making exempt rental supplies of residential property). Any VAT expenditure incurred directly relating to taxable supplies will be reclaimable in full but any VAT expenses that relate both to taxable and exempt supplies made by the Property AIF such as overhead costs is likely to be subject to partial exemption calculations - seeVAT notice 706: Partial exemption or the VAT partial exemption guidance for further information on this point.