Government launches consultation: VAT treatment of fund management

United KingdomScotland

On 9 December 2022, the UK Government published a technical consultation on proposed reform of the VAT rules on fund management.

Its scope is fairly limited, aiming to improve legal clarity and certainty regarding the scope of the exemption from VAT for management of certain funds, as opposed to a more significant change of policy. The consultation will close on 3 February 2023.

The consultation sets out a proposal to codify current UK policy for the VAT treatment of fund management into UK law. The proposal is to:

  • Retain the list of exempt fund types currently comprising items 9 and 10, Group 5, Schedule 9 VATA 1994, but not to extend this list in future;
  • Legislate to establish defined criteria to determine which funds are entitled to the SIF exemption, alongside the existing list of funds in VATA.

The proposed criteria for SIF treatment are:

  • The fund must be a collective investment;
  • The fund must operate on the principle of risk-spreading;
  • The return on the investment must depend upon the performance of the investments and the holders must bear the risk connected with the fund; and
  • The fund must be subject to the same conditions of competition and appeal to the same circle of investors as a UCITS (Undertakings for Collective Investment in Transferable Securities), that is funds intended for retail investors.

CMS comment

The existing EU law requirement for SIF status of ‘State Supervision’ of the relevant fund is not proposed to be included in the new UK definition of a SIF. The absence of this criteria, which has proved to be source for confusion and conflicting practices across Europe, while not a substantive change is likely to be a welcome development.

It will be interesting to see if the UK Government is willing to entertain representations on some other problem areas in the UK arising from case law of the Court of Justice of the European Union. For example, whether defined contribution pension funds with a GMP (guaranteed minimum pension) are capable of qualifying as a SIF, and in what circumstances, under the new UK definition.

For further information, please contact the authors or your usual CMS contact.