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ECJ Agrees VAT Exemption For Investment Trusts

by Jason Gorringe, Tax-News.com, London

02 July 2007


The European Court of Justice has backed claims by the UK investment trust industry that the management of closed-ended investment funds (including Investment Trust Companies) should qualify for exemption from VAT.

The ECJ said that discrimination against closed-ended investment funds "does not appear justified", and that VAT exemption will apply to management of Investment Trust Companies as they "constitute investment funds comparable to AUTs and OEICs."

Although a Member State is entitled to determine the special investment funds whose management is exempt from VAT, that power is fettered by the requirement to ensure that, in exercising its discretion, it does not offend the exemption provision or the principles of fiscal neutrality. Competing investment funds must be treated equally in relation to the charging of VAT.

Marc Welby, Director of VAT at tax specialists Chiltern plc, said: "I expect the investment companies will be ecstatic. This decision follows years of arguing for parity of VAT treatment with other collective investment schemes."

"The ECJ has confirmed that investment trust companies and open-ended funds are comparable in terms of allowing access to wide-ranging portfolios and reducing stock market risk. So they too should benefit from VAT exemption on management fees they incur. Interestingly, the Court has not endorsed the Advocate General's view that a pre-requisite for exemption is the need for the investor protection afforded by an investment trust company to be broadly comparable to that afforded by unit trust and OEICs. Such a requirement may have created a hurdle."

Mr. Welby added: "Although in principle the UK VAT Tribunal now has to interpret the decision of the ECJ and make findings of fact, given the strength of the decision and the very clear guidance it has given it is inconceivable that the Tribunal will not find in favour of the appellants. Furthermore, this decision is likely to see the floodgates open to claims by numerous other forms of pooled investments, such as pension funds, unit linked life assurance policies, investment clubs and venture capital trusts. It will open the door to claims to recover hundreds of millions of pounds wrongly paid over in VAT over the last 17 years. "

Investment trusts alone could seek to recover the £40m estimated by the AIC to have been charged in VAT annually by investment managers, who in turn are now expected to seek to recover losses from HM Revenue and Customs.

Mr. Welby further added: "Other EU Member States, such as Germany and Belgium, would now do well to review their treatment of special investment funds as their own domestic provisions appear to be at odds with the decision of the ECJ."

The case at the centre of the issue was brought by J P Morgan Fleming Claverhouse Investment Trust plc together with the AIC (Association of Investment Companies). The latter has been clamouring for a change to the UK VAT legislation for a number of years.


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