The Government is expected to introduce changes to the VAT exemption for fund management with effect from 01 April 2020.
Following delays to the date on which the UK is expected to leave the EU, the Government has decided to revoke the VAT (Finance) (EU Exit) Order 2019 (the Finance Order). Instead the Government has indicated that the changes will be introduced in another instrument which will have effect from a fixed date, expected to be 01 April 2020, whether or not exit has occurred by that date.
The Finance Order provided for an extension to the UK domestic exemption for the management of SIFs in VATA 1994 Sch 9 Group 5 Item 9 designed to implement the decision of the CJEU in ATP PensionService (Case C-464/12), which had already been reflected in HMRC practice on an optional basis. The exemption for the management of SIFs was to be extended to the management of “a recognised pension fund”. The Finance Order defined a recognised pension fund as a pension fund which is solely funded (directly or indirectly) by its members, which pools the investments of more than one pension member, in which the members bear the investment risk and where that risk is spread over a range of investments. It should be noted that the definition required the pension fund itself to spread the investment risk and the exemption would not apply if the pension fund invested in another fund which itself spread the risk over a range of investments.
In addition, the Finance Order was to remove the requirement in Note 6 of Group 5 for a “closed ended collective investment undertaking” (the management of which is exempted under VATA 1994 Schedule 9 Group 5 Item 10) to invest “wholly or mainly in securities”. Again, this was intended to align domestic VAT law with the comments of the CJEU in Fiscale Eenheid X (Case C-595/13) that the exemption for the management of a SIF can, in principle, extend to a property fund, which again had already been reflected in HMRC practice on an optional date.
Replacement of the SI
Following representations made to Government concerning the uncertainty caused by linking the provisions with “exit day”, together with the lead in time needed to enable the pension fund industry and asset managers to adapt to the changes proposed by the Finance Order, it has now agreed that the changes should come into effect on a fixed date (expected to be 01 April 2020) rather than EU Exit Day in order to provide certainty about the timing of the change. In the event of the UK leaving the EU before 01 April 2020, it is expected that HMRC would exercise its statutory discretion to retain the current position until the SI is in place.
The VAT (Finance) (EU Exit) (Revocation) Order 2019 (SI 2019/1014) will revoke the Finance Order with effect from 08 July 2019. The Government will now need to introduce a new SI to make the necessary changes. It is not clear at this stage whether the SI will be in exactly the same terms as the revoked Finance Order (apart from the effective date) or whether any changes will be made to it. Until the new SI comes into force, taxpayers can continue to rely on the HMRC practice set out in guidance.
It is perhaps somewhat ironic that changes to be introduced to bring the UK statutory VAT position into line with EU law were tied to EU Exit Day. Nevertheless, the decision to introduce the changes from a fixed date sufficiently far in the future to give the industry time to adjust their processes is to be welcomed. In particular, concerns that the definition of a “recognised pension fund” in the Finance Order extended to non-UK as well as UK pension funds meant that care would need to be taken by managers providing their services to foreign pension funds or arrangements to classify the recipient of their services correctly, given the potential impact on the manager’s input VAT recovery position. Clearly this is a point that may need to be considered too in respect of the new SI, depending on its terms.
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