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HMRC internal manual

VAT Finance Manual

Management of investments, portfolios, funds, ‘wrapper’ products and related services: collective investment undertakings (CIU)

As the name suggests, CIU are in the business of collective investment i.e. they pool and invest capital raised from the public and do so for a fee or ‘management charge’. It is this management charge that is the subject of the VAT exemption. CIU may be constituted in various legal forms e.g. under statute as companies (such as OEIC), under trust law (such as AUTS) or by contract (the French fonds communs de placement, ‘FCP’, is an example). Common to all of these is that investors hold shares or units in the CIU, but the CIU may be open-ended or closed-ended.

Open-ended means the CIU has variable capital. The number of shares in issue continually changes as new shares are issued to new investors and shares are cancelled when investors decide to cash them in. The shares are regularly valued (often daily) as being the net asset value (NAV) of the fund, divided by the number of shares in issue.

Closed-ended means that the CIU has fixed capital. Following an initial issue of shares, the number of shares in issue remains fixed (subject to further one-off issues or share buy-backs). Unlike an open-ended CIU, there is no requirement to redeem shares from investors who wish to cash them in. Rather, the shares are traded on a stock exchange so that investors can buy and sell them at the market rate. This market rate may be higher or lower than the corresponding NAV, in which case the shares are said to be trading at a premium or discount to the NAV.