Management of investments, portfolios, funds, ‘wrapper’ products and related services: exemption for the management of ‘special investment funds’
Article 135(1)(g) of the Principal VAT Directive exempts ‘the management of special investment funds as defined by Member States’.
Until 30 September 2008, UK law (Items 9 and 10, Group 5, Schedule 9 to the VAT Act 1994) defined the following funds for the purposes of the exemption:
- Authorised unit trust schemes (AUTS)
- Open-ended investment companies (OEIC)
- Trust-based schemes (TBS)
AUTS and OEIC are UK open-ended collective investment schemes, regulated by the Financial Conduct Authority (FCA) as authorised investment funds (AIFs).
TBS are single property schemes and none has been authorised in recent years. The category is now largely redundant and was therefore removed from the VAT exemption with effect from 1 October 2008.
Further changes from 1 October 2008 have followed the ECJ judgment in *JP Morgan Fleming Claverhouse Trust plc (‘Claverhouse’ case C-363/05) *which ruled on the interpretation of the term ‘special investment funds as defined by Member States’.
The key points in this judgment are:
- the term ‘special investment funds’ is capable of including closed-ended investment funds, such as investment trust companies (ITCs)
- Member States have a discretion to define ‘special investment funds’ for the VAT exemption but, in doing so, must pay due regard to:
- the purpose of the exemption
- the principle of fiscal neutrality.
According to the Court, the purpose of the exemption is to facilitate investment in securities for investors through investment undertakings.
This requires there to be VAT neutrality between the direct investment in securities and investment through collective investment undertakings, as the latter incurs a management charge. Furthermore, there must be equality of VAT treatment for funds which are similar to, and in competition with, funds falling within the scope of the exemption such as those covered by the UCITS Directive (this sets out common EU rules for the regulation of ‘Undertakings for Collective Investment in Transferable Securities’). To the extent that it concerns funds covered by the UCITS Directive, the term ‘special investment fund’ has a common meaning within the Community.
In consequence of this, the exemption has been extended so that there is a level VAT playing field for all similar collective investment undertakings which compete in the UK retail market (i.e. for investment by the general public) under comparable conditions. This includes closed and open-ended collective investment undertakings which meet the revised definitions regardless of where they are established.
Authorised Contractual Funds
On the 28 June 2013 the FSMA was amended to include authorised contractual funds (ACF) in the definition of collective investment schemes. This puts the newly introduced authorised contractual fund (commonly known as the ‘tax transparent fund’) on the same regulatory basis as AUTs and OEICs in the UK. At the same time as this regulatory change, ACFs were added to item 9 of the UK VAT law, thereby qualifying them as SIFs for the purposes of the fund management exemption.
ACF is an authorised contractual arrangement to pool assets. It has no legal personality and does not constitute an entity in its own right. The assets are held and managed on behalf of a number of investors (participants) who are co-owners of the scheme. A contractual arrangement is transparent for the purposes of tax and the participants remain responsible for any tax due on their share of the income and gains in the fund. For this reason, an ACF is described as ‘tax-transparent’. There are two contractual fund types, the co-ownership fund and the partnership fund.
In Fiscale Eenheid X (C-595/13), the CJEU considered whether immoveable property/real estate held by a company or fund with more than one investor is a “special investment fund” under Article 135(1) (g) of the VAT Directive. The Court concluded that collective investment vehicles investing in real estate should fall within the exemption provided that the Member State concerned has made those vehicles subject to specific state supervision.
UK legislation currently confines the scope of the fund management exemption to funds that invest “wholly or mainly in securities”. The judgment in Fiscale Eenheid X however means that no restriction should be placed on the nature of the assets in which a fund invests for exemption to apply and UK legislation will be amended in due course to reflect this.