VATFIN5100 - Management of investments and portfolios, funds and ‘wrapper’ products and related services: Exemption for the management of “special investment funds”

Article 135(1)(g) of the Principal VAT Directive exempts “the management of special investment funds as defined by Member States”.

Until 30 September 2008, UK law (Items 9 and 10, Group 5, Schedule 9 to the VAT Act 1994) defined the following funds for the purposes of the exemption:

• Authorised unit trust schemes (AUTS)
• Open-ended investment companies (OEIC)
• Trust-based schemes (TBS)

AUTS and OEIC are UK open-ended collective investment schemes, regulated by the Financial Services Authority (FSA) as authorised investment funds (AIFs).

TBS are single property schemes and none has been authorised in recent years. The category is now largely redundant and has been deleted from the VAT exemption with effect from 1 October 2008.

Further changes from 1 October 2008 have followed the ECJ judgment in JP Morgan Fleming Claverhouse Trust plc (“Claverhouse” case C-363/05) which ruled on the interpretation of the term “special investment funds as defined by Member States”.

The key points in this judgment are:-

1. the term “special investment funds” is capable of including closed-ended investment funds, such as investment trust companies (ITCs);
   
   
2. Member States have a discretion to define “special investment funds” for the VAT exemption but, in doing so, must pay due regard to-
   
   

According to the Court, the purpose of the exemption is to facilitate investment in securities for investors through investment undertakings.

This requires that there is VAT neutrality between the choice of direct investment in securities and investment through collective investment undertakings, as the latter incurs a management charge. Furthermore, there must be equality of VAT treatment for funds which are similar to, and in competition with, funds falling within the scope of the exemption such as those covered by the UCITS Directive (this sets out common EU rules for the regulation of “Undertakings for Collective Investment in Transferable Securities”). To the extent that it concerns funds covered by the UCITS Directive, the term “special investment fund” has a common meaning within the Community.

In consequence of this, 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 retail market (i.e. for investment by the general public) under comparable conditions. This includes closed- and open-ended collective investment undertakings which meet the revised definitions regardless of where they are established.