UK and International Tax news

HM Treasury Confirms VAT Treatment of Fund Management Services

Thursday 15th February 2024

HM Treasury has recently issued its response to the consultation on the VAT treatment of fund management services and the existing VAT exemption for management services of funds listed under Group 5 items 9 and 10 of Schedule 9 VATA 1994.

At Budget 2020, the government announced a wide ranging review of the UK fund regime, covering tax and relevant areas of regulation and including a VAT workstream. This was in response to stakeholder representations that suggested there were opportunities to enhance the UK’s attractiveness for fund domicile and related entities.

In December 2022, the government published a technical consultation on the VAT treatment of fund management services. The consultation set out how the government intended to improve policy clarity and certainty for all stakeholders on the application of the VAT exemption for fund management services and remove reliance on retained EU law.

It proposed to codify in legislation what was meant by the term Special Investment Fund in respect of the VAT treatment of fund management, and retain the current list of exempt fund types, comprising items 9 and 10 of Gp 5, to which the fund management exemption applies.

The current UK regime for the VAT treatment of fund management depends on UK law, which sought to implement the EU VAT directive while part of the EU, and the direct effect of CJEU cases based on the application of Article 135 (1)(g) of the EU VAT Directive.

UK law lists fund types eligible for exempt management in items 9 and 10 of Group 5, effectively a ‘whitelist’. CJEU case law has been distilled into five principles which a fund must meet to count as a SIF, and SIFs are also eligible for exempt management. The approach outlined in the consultation aimed to support the UK fund management industry that utilises the VATA provisions and do not meet the SIF criteria, and those that do meet the SIF criteria but not the VATA provisions.

Following the December 2022 consultation, which closed on 3 February 2023, the government held a series of meetings between June and July 2023 to explore the various industry operating models and how they interacted with the proposed reforms. The government also tested views in relation to the impact of the Retained EU Law (Revocation and Reform) Act 2023 coming into effect at the end of 2023. The government conducted further bilateral engagement with individual businesses and industry bodies over the autumn to ensure that its proposed legislative approach was clear, provided certainty, and was as simple as possible.

The majority of stakeholders understood the reasoning behind the government’s proposal for a principled-based approach to determine if a fund type was exempt from VAT, but preferred a list-based approach in determining whether the fund management VAT exemption applied. Stakeholders felt that such an approach provided greater clarity and certainty, whilst a principled-based approach left room for interpretation, would be time consuming for businesses to determine and could lead to greater litigation rather than less.

Although from the consultation it was clear that items 9 and 10 were widely used, the government undertook further work with industry to determine whether Items 9 and 10 captured fund types which currently qualify as exempt. This engagement suggested that existing UK legislation covered the vast majority of fund types.

Overall, respondents agreed that retaining items 9 and 10 would provide greater clarity and reduce uncertainty in the VAT treatment of fund management. However, they suggested there could be greater clarity on the application of the existing fund management VAT exemption by defining the term management.

After fully considering the consultation responses and the outcomes of the additional stakeholder discussions, the government considers that existing UK VAT legislation covers the vast majority of fund types for which management services should be VAT exempt. The list-based approach of Items 9 and 10 of Gp 5 Sch 9 provides the industry with sufficient legal certainty.

The government has considered calls for the introduction of a definition of ‘management’ of a fund in legislation but has concluded that the current position established by settled case law provides sufficient legal certainty.

Several respondents made suggestions outside the scope of the consultation including proposals to zero rate fund management services to UK domiciled funds to increase UK competitiveness in terms of fund domicile and to expand the scope of the VAT exemption. However, the government has proposed no changes in these areas.

The Financial Secretary to the Treasury stated in his written statement of 14 December 2023 “that businesses will not be able to rely on direct effect of EU law after 31 December 2023 when the Retained EU Law (Revocation and Reform) Act 2023 comes into effect. The VAT exemption for the management services of those funds listed under Items 9 and 10 of Group 5, Schedule 9 of the VAT Act 1994 will remain in place. This approach is in line with respondents’ views, and meets the stated aims of providing clarity, certainty, and simplicity. HMRC will issue updated guidance to reflect this change in the coming months. The government will continue engaging with interested businesses”.

 

For further information on the above, please contact Keith Rushen on 0207 486 2378.

 

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