ECJ's Abbey Ruling Could Save Fund Managers Millions In VAT

by Ulrika Lomas, Tax-News.com, Brussels

08 May 2006

The European Court of Justice has delivered a landmark ruling in a value added tax case which is expected to have widespread implications for costs incurred by the fund management industry.

The case, which involves Abbey National Plc and Inscape Investment Fund, went to the ECJ after Britain's VAT and Duties tribunal asked the court to rule on whether national governments are entitled to decide which types of fund management service qualify for a VAT exemption, under the Sixth VAT Directive.

Abbey, which is owned by Spain's Bank Santander, had argued that the UK government was not entitled under EU law to impose VAT on certain fund management services that Abbey had outsourced to third parties.

In last week's ruling, the ECJ stated that although depository services remain taxable, administration services will now be exempt from VAT. However, this means that countries such as Luxembourg, Ireland and France - which haven't been charging VAT on depository services - will no longer be exempt from VAT on these services.

However, the judgement is expected to have ramifications for Europe's entire fund management industry, and not just these jurisdictions. Peter Mason of CMS Cameron McKenna LLP, who led the team advising Abbey, believes that the ECJ's decision will help to further open up the European funds market, and has removed a "serious fiscal obstacle" to efficient outsourcing.

"This will affect both UK and overseas businesses involved in the funds industry and they will need to look carefully at what the implications of this outcome are for them and to what extent they, or their service providers, may be entitled to VAT exemptions," he explained.

Fund managers will be able to reclaim VAT that has been overpaid within the past three years. Abbey's total VAT bill relating to fund management services stood at GBP101 million at the end of 2004.

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