Points referred to the ECJ
The case concerned the VAT treatment of supplies made by a Dutch real estate fund manager. In addition to fund management services, the fund manager also provided various property (i.e. asset) management services for the portfolio. It argued that both the fund and the property management services should be exempt supplies for VAT, since these are within the scope of the management of “special investment funds” as defined in EU law. The ECJ was asked by the Dutch courts to rule on two questions:
- Does the management of the real estate fund fall within this VAT exemption?
- If so, is the management of the properties also a VAT exempt supply?
Ruling and application to UK funds
On the first question, the ECJ held that the VAT exemption applies to the management of two categories of funds:
1. Special investment funds (as defined in national law)
In the UK, this already includes authorised OEICs, ACSs and AUTs, as well as similar overseas collective investment schemes. Management services for each of these already fall within the VAT exemption provided under UK law at Item 9, Group 5, Schedule 9 of VATA.
2. Other investment funds that have similar characteristics and are subject to comparable specific state supervision
The ECJ ruled funds that involve investors pooling capital with a view to purchasing, owning, managing and selling (immovable) property and obtaining a profit to distribute to unit-holders have similar characteristics to special investment funds. They are therefore capable of falling within the VAT exemption, provided that they are subject to comparable specific state supervision.
We await HMRC’s reaction to the case. They may take the view the existing UK definition of special investment funds is compatible with EU law. However, it appears that in the UK category 2 above may well be capable of including alternative investment funds (AIFs). Following the ECJ judgment in JP Morgan Fleming Claverhouse Trust plc (Case C-363/05), from 1 October 2008 the UK VAT exemption for investment management services has been extended to also include the management of UK investment trusts, which are also AIFs. The description of AIFs in the implementing UK regulations suggests they are likely to have the characteristics described above; the key issue is whether they can also be seen as being subject to “comparable specific state supervision”. The AIFMD and its UK implementing regulations largely regulate fund managers (AIFMs) rather than the AIFs themselves, which gives rise to some uncertainty. But there is a good argument that fund management services supplied by AIFMs may now need to be treated as VAT exempt. It is also questionable whether alternative funds whose managers fall under the de minimis threshold of the AIFMD can be considered as being subject to specific state supervision.
It is unclear what discretion the UK may have on whether or not to include AIFs within the definition of special investment funds, and various European tax authorities taking different positions could lead to different outcomes across Europe for the ability of AIFMs to recover input VAT.
If the UK does consider that AIFs are subject to specific state supervision, as noted in the attached bulletin, AIFMs in the UK that have been charging VAT in relation to their fund management services may therefore be entitled to reclaim this VAT from HMRC. Since VAT refunds are subject to a four year limitation period (which broadly runs from the end of a VAT period), it may be necessary to bring protective claims quickly. While this may provide a short term benefit, the inability to charge VAT on fund management supplies is likely to affect the ability of fund managers to recover input VAT going forward. Fund managers should therefore bear this new case in mind when drafting new agreements, and may also wish to review existing agreements to identify where any risks lie. It may be helpful to insert drafting that allows fund managers to increase their fund management charges to compensate for any irrecoverable input VAT.
On the second question, the ECJ held that since the management of the properties themselves was not specific to the management of the investment fund, this service does not fall within the scope of the VAT exemption. This is a relatively unsurprising conclusion, and reflects the current position under UK law.