Item 10 (amended from 1 October 2008) exempts the management of
“closed-ended collective investment undertakings”.
In line with the Claverhouse case, fund management services
for investment trust companies (ITCs) and venture capital trusts
(VCTs) are exempt from VAT. In addition, fund management services
in respect of any other closed-ended CIU which satisfies the
conditions in Note (6) are also exempt. Real estate investment
trusts (REITS) are unlikely to meet the condition for investment
“wholly or mainly in securities”.
The conditions in Note (6) take account of criteria similar
to those for the open-ended funds in item 9. This includes a
comparable (albeit under different regimes) level of regulation,
and the market for investment by the general public in the UK. If
the CIU satisfies the conditions in the definition, it will qualify
for the exemption regardless of where it is established.
There is some consistency between these conditions and the
definition which currently applies to open-ended CIU in the UCITS
Directive. This, too, refers to the sole object being investment of
capital raised from the public and the investment restrictions in
that Directive ensure that investment risk is spread across e.g. a
range of securities. In interpreting “sole objective”,
no regard should be had to secondary investment aims – for
example investing in particular markets or in “ethical”
investments. Rather this means that the CIU must not carry on any
significant activity other than that of collective investment. In
this context, incidental activities, for example letting out space
in a head office, should be viewed as de minimis and ignored. The
fact that a CIU might invest or reinvest funds arising from its
investments or as part of its investment strategy does not alter
the objective of investing capital raised from the public. For
example, many of them borrow, or “gear”, but this is
part and parcel of the objective of investment.
“Wholly or mainly in securities” is defined by
reference to the objective of the fund which should be to invest in
securities rather than other asset classes (and so be in keeping
with the purpose of the exemption as determined in the Claverhouse
case). As elsewhere in the VAT exemptions, “securities”
here includes shares, equity and debt securities and other
financial instruments e.g. financial derivatives. It is however
recognised that, because of market conditions, the asset mix may
vary – for example increased investment into cash. Provided
the objective of the fund remains to invest in securities, we do
not envisage this impacting on the exemption. But if the objective
becomes one of investing predominantly in other asset classes (such
as property), then its management will fall outside the exemption.
It should also be noted in this context that, where a fund has the
objective of investing in immovable property it may do so by
setting up a company for each of its investment properties. The
fact that it then wholly owns the shares in these subsidiaries does
not mean that its objective to invest in property is altered.
By listing, the CIU must comply with rules made by the FSA
in its capacity as UK Listing Authority. Where it is listed as a
“closed-ended investment fund”, it will satisfy the
“sole objective” criterion, but only if this is to
invest wholly or mainly in securities. On the other hand, there may
be instances where a CIU is listed other than as a closed-ended
investment fund, but nevertheless satisfies all the conditions for
its management to be exempt.
EU-wide minimum standards of regulation apply to those CIU
whose shares are traded on a regulated market. These concern the
detail to be provided to investors in the CIU prospectus and other
disclosure requirements. Currently, the only regulated markets in
the UK are the main London Stock Exchange (LSE), the PLUS trading
platform for listed securities and SWX Europe (formerly Virt-x, a
London exchange for certain Swiss companies). Other markets
operated by the LSE, e.g. AIM are not regulated markets.
