UK - The UK government has confirmed the definition of 'special investment funds' which are exempt from Value-Added Tax (VAT) has been extended to include Investment Trust Companies (ITCs) and open-ended and closed-ended collective investment undertakings (CIU).

In updated draft guidance, HM Revenue & Customs (HMRC) said the changes to the VAT exemption of 'special investment funds' followed the European Court of Justice (ECJ) ruling in the JP Morgan Fleming Claverhouse case in June 2007, in which it ruled ITCs were exempt from VAT.

Following the ruling, HMRC stated in a briefing note in November 2007 the ruling only applied to ITCs and could not be applied to other investment funds.

This led the National Association of Pension Funds (NAPF) and the Wheels Common Investment Fund (WCIF) to issue a legal challenge in May 2008 to decide if investment management services supplied to occupational pension schemes should be exempt from VAT. (See earlier IPE article: UK pension fund mounts VAT challenge)

HMRC has since confirmed in its update that the VAT exemption will apply, as of 1 October 2008, to authorised unit trust schemes (AUTS) open-ended investment companies (OEIC) and ITCs.

However, it added because of the consequences of the Claverhouse ruling "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 market under comparable conditions".

This means, subject to conditions, the exemption now covers "the management of closed-ended collective investment undertakings and open-ended collective investment undertakings, where their units or shares are made available to UK investors, regardless of where the fund itself is established".

These include all UK-established AUTs and authorised OEICS and recognised overseas schemes - these are those based in the European Economic Area (EEA), including Gibraltar, those established in Guernsey, Jersey, Isle of Man or Bermuda, and schemes that are based in other countries "which have similar regulation to UK and have been given an individual recognition order by the FSA so that their units can be marketed to UK investors".

In addition, HMRC confirmed that VAT exemption would apply to "the activities of administering the CIU as well as investment management activities", particularly when considering the liability of services delegated to a third party, in which circumstance "investment management services provided by a third party (usually under a mandate) are also exempt as part and parcel of the management of the fund".

The VAT update also states if a third party is delegated to carry out a package of administrative services "which overall has the distinct characteristic of a single supply of fund management services", this will also be exempt, although some services - such as that of a solicitor in drafting documents - will not be treated as fund management.

However, it is not believed the changes announced by HMRC is likely to impact the case brought by the NAPF, which is still waiting to proceed.

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