HMRC Unveils Policy Changes Regarding VAT Exemption For Funds

by Jason Gorringe, Tax-News.com, London

29 June 2006

Following the European Court of Justice's delivery in May of a landmark ruling on the VAT treatment of funds, HM Revenue and Customs has unveiled its new policy.

The case, which involved 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 month'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.

The changes to HMRC’s policy concerning the VAT exemption for the management of authorised collective investment schemes, which were unveiled on Tuesday, are set to apply from 1 October 2006.

The UK tax authority stated this week that businesses which have taxed fund administration services which satisfy the criteria outlined by the ECJ ruling should exempt such services made from 1 October 2006, and that where businesses wish to make a claim to HMRC for a repayment of output tax incorrectly paid, they may do so, subject to certain conditions.

It explained that:

"All adjustments or claims are limited to a three-year period and will be subject to the following conditions:

• All claims must take into account input tax that has been claimed, but which under the revised interpretation will not relate to taxable supplies.
• Businesses must be able to produce evidence that they accounted for VAT in the circumstances described above, and must be able to substantiate the amount claimed.

Subject to the three-year limitation period, any claim should be for all prescribed accounting periods in which the liability error occurred."

"Should a claim not take into account all errors or all affected accounting periods, then HMRC will seek to set-off amounts owed to us for these periods against amounts claimed in other periods."

"HMRC may reject all or part of a claim if repayment would unjustly enrich the claimant...A notification to HMRC that a business intends making a claim in the future is not a valid claim."

"Businesses that have lodged “protective” claims pending the judgments should review them to ensure that they comply with the criteria of the judgment explained in this Business Brief and satisfy the above conditions. In particular, any claims in respect of the services of trustees or depositories should be excluded, as the ECJ confirmed HMRC’s view that the supply of these services is taxable at the standard rate."

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