VAT treatment of fund management: consultation

The HM Treasury and the HM Revenue & Customs have published a joint consultation conclusion as regards the tax treatment of investment funds for purposes of „replacing“ the retained Directive 2006/112/EC (UK VAT Tax Directive) as further described below. The conclusion follows a corresponding consultation launched in December 2022.
##### Background
In the above noted consultation, the two government agencies sought views on the sufficiency of the Value Added Tax Act 1994 to replace the retained Directive in an effort to further tax exempt UK investment funds so as to maintain competitiveness of the UK funds industry. The noted retained Directive includes an exemption from VAT for Special Investment Funds (SIFs) in Article 135(1)(g); however, it was and still is up to member states to define what constitutes a SIF, despite further guidelines that were issued by the European Commission in 2017 as to the criteria a fund should meet to be considered a Special Investment Funds (the guidelines aren’t mandatory). On the other hand, the Value Added Tax Act 1994 sets out in schedule 9, group 5 tax exemptions for the following – as quoted:
– The management of:
– an authorised open-ended investment company; or
– an authorised contractual scheme; or
– an authorised unit trust scheme; or
– a Gibraltar collective investment scheme that is not an umbrella scheme;
– a sub-fund of any other Gibraltar collective investment scheme;
– an individually recognised overseas scheme that is not an umbrella scheme;
– a sub-fund of any other individually recognised overseas scheme;
– a qualifying pension fund; and
– The management of a closed-ended collective investment undertaking.
So far, UK funds could use either of the two pieces of legislation to verify their tax exempt status. The HM Treasury and the HM Revenue & Customs sought to find about about the number of firms relying on the SIF definition of the EU and sought to know whether or not the activities described in the UK Tax Act sufficiently describe investment fund activities to maintain the VAT exemption following the discontinuation of the EU retained Directive. Furthermore, the regulators sought views on replacing and incorporating the current SIF definition in UK law.
##### Feedback and way forward
Nearly none of the respondents relied on the retained EU Directive for verifying their tax exempt status. In fact, most commenters found that the list provided in schedule 9 of the VAT Act 1994 provided clear guidelines as to which activities are tax exempt and which are not. However, some respondents sought clarification as to the definition of „management“ so as to delineate management activity from other investment fund activities.
Having reviewed the feedback, the two regulators concluded that the current 1994 Tax Act along with relevant case law provides sufficient legal certainty to UK investment funds. Therefore, they intend to make no changes to the Act following the cessation of the retained EU VAT Directive and they intend NOT to make separate legislation just for the purpose of defining the tax exempt status of investment funds. However, they acknowledge the need for more clarity as regards the definition of „management“ and will take this issue forward to issue corresponding guidance in the future.