VATFIN5300 - Management of investments, portfolios, funds, ‘wrapper’ products and related services: VAT exemption for the management of closed-ended collective investment schemes
Item 10 (amended from 1 October 2008) exempts the management of ‘closed-ended collective investment undertakings’.
In line with the Claverhouse case (VATFIN5100), 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.