CJEU decisions on asset management could have far-reaching effects in the UKJuly 11, 2013
On 7 March 2013, the European Court of Justice (CJEU) ruled on the VAT treatment of asset management in the cases of Wheels Common Investment Fund Trustees Ltd (Wheels) and GfBk Gesellschaft für Börsenkommunikation mbH (GfBk).
Both cases turn on the interpretation of the exemption provided for in Article 135(1)(g) of Council Directive 2006/112/EC3 for “the management of special investment funds as defined by Member States” (the exemption). Two elements are required for the exemption to apply:
- The services must be fund management services.
- They must be provided to a special investment fund.
The two cases the CJEU considered are each concerned with one of these two conditions:
- In Wheels, it was common ground that the services constituted “fund management,” but the issue was whether the fund manager’s customer (a defined-benefit pension fund) constituted a “special investment fund.”
- In GfBk, it was common ground that the customer was a “special investment fund,” but the issue was whether nondiscretionary investment advisory services constituted “fund management.”
The CJEU ruled against Wheels but in favor of GfBk. This article considers the implications of these decisions for UK businesses.
Implications for UK firms
The judgment in Wheels confirmed the current treatment in the UK and, therefore, any major impacts for businesses are unlikely. The HMRC is likely to reject fund managers who have submitted claims for repayment of VAT on the basis of Wheels. In cases where fund managers have appealed against any such rejections, these appeals will likely fail where the facts are similar to those in Wheels. Equally, any actual or potential claims by funds against fund managers with respect to these issues are unlikely to succeed.
However, each claim must be considered on its own merits. In particular, one of the grounds for the CJEU’s judgment was that the beneficiaries were not at risk since the pensions were defined benefit. The CJEU might have reached a different conclusion with respect to a defined contribution scheme.
The judgment in GfBk followed the opinion of the Advocate General. While this decision runs contrary to the position taken by the UK tax administration, the impact on taxpayers in the UK may be limited. Although GfBk did not have discretion, in practice, its customer entered into each transaction that was suggested, typically within minutes, having checked only that the recommended investments were not prohibited.
HMRC already accepts that investment management is exempt where the third party has discretion to enter into transactions, and in the UK, we understand in practice that most such services are provided on a discretionary basis with the third party undertaking only to enter into permitted transactions.
The judgment will, however, permit a wider range of services to be provided on an exempt basis. Where services have been treated as taxable, but if the facts of the situation agree with the GfBk case, the suppliers should make claims to HMRC for a repayment of VAT if they have not already done so, and follow up on any claims that have been made. Investment management companies in such circumstances may wish to seek repayment from their suppliers of VAT paid in error.
The judgment in Wheels confirms the view historically taken by HMRC. Unless funds or fund managers consider that there are sufficient material differences between their circumstances and those set out in the Wheels case, fund managers should continue charging VAT on services to defined-benefit pension schemes.
Where circumstances differ from the Wheels case, fund managers may wish to keep any claims or appeals alive pending further developments. This may be particularly the case for claims with respect to the management of defined-contribution pension schemes.
The judgment in the Wheels case makes it clear that such schemes are not special investment funds, since they are not open to the public; however, the question remains open whether they are sufficiently similar to those funds, such that the principle of neutrality requires the exemption to apply. The key reason that the CJEU held that the principle of neutrality did not assist Wheels was that the members of the scheme did not bear the risk of the investments.
That situation does not apply in a defined-contribution scheme, where the entire risk is with the employees. The CJEU may well have reached a different decision in such a case.
HMRC may take some time to consider the GfBk judgment before formally responding. Therefore, some level of uncertainty may remain for a while as to the decision’s impact in the UK.
We understand that there are limited circumstances where fund managers in the UK will have charged VAT in the same circumstances as in GfBk — the fund managers would typically be given discretion in order to secure exemption. However, this will not universally be the case. Even where the facts of the GfBk case do apply, affected businesses need to take the full impact of the decision into account.
Where fund managers are entitled to a repayment of VAT, this will be on a net basis — i.e., the output tax overpaid less the input tax wrongly recovered. On an ongoing basis, the fund manager would not be able to recover the associated input tax and, therefore, the costs of the fund manager would increase.
Depending on the fund manager’s partial exemption recovery method, the increase in exempt supplies may also reduce the proportion of VAT recoverable on general overheads. Whether such costs can be recovered from the funds will depend on the terms of the contract between them.
There is also the issue of whether the funds are entitled to recover the gross amount of VAT paid to the fund managers over the full period permitted by claims in civil law or whether what they are entitled to is limited to the net sums recovered by fund managers from HMRC for the uncapped periods.
In this regard, fund managers are likely to maximize their protection against being liable to repay funds more than they recover from HMRC by taking prompt action to make claims and keep them up to date.
However, the most significant impact is likely to be in permitting a broader range of ways for third parties to provide investment-related services without the impact of VAT.
Read the full version of this article in the Ernst & Young Indirect Tax Briefing, issue 7 (pdf, 7.13 MB).
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