For immediate release: Monday 12 September 2005

MOVE TO EXEMPTION – POTENTIAL REDUCTION IN COSTS FOR FUNDS

European Court of Justice Advocate General supports Abbey National case

The much-anticipated Advocate General’s (AG) Opinion on the Abbey 2 case (Case C-169/04) was delivered last week.  Abbey argued that the delegation of all or part of any service, such as fund administration, from an operator of a UK authorised investment fund to a third party administrator should, subject to conditions, qualify for a VAT exemption on management feesą.  The conclusions reached by the Advocate General found in favour of Abbey.

Both EU and UK law allow for the management of “special investment funds” to be exempt from VAT.  In the UK such exemptions are limited to authorised unit trusts and open-ended investment companies (OEICs).  However, the current UK definition of “management” is narrow, so depositary or trustee services and fund administration frequently do not count as “management” and therefore do not qualify for VAT exemption.  The EU Community Law definition of “management”, however, is much wider and so comparatively more services are VAT exempt in other jurisdictions.

Abbey argued that the definition of “management” in the UK should be based on EU Community and not UK law, and that therefore the wider definition of “management” should enable the delegation of services to a third party administrator to qualify for VAT exemption. 

While the Advocate General held that investment management was a Community Law concept and agreed that a wider definition of “management” should apply, the final decision of the European Court of Justice (ECJ) is awaited.  It should be noted however, that although the AG’s opinion is a non-binding proposal to the ECJ as to how a case should be decided, it is generally considered indicative of the final decision.

Julie Patterson, Director of Regulation, Operation and Taxation tax at the IMA said:

"If the European Court of Justice agrees with the Advocate General’s opinion, then UK funds could see an overall reduction in costs.  However, the costs of the parties providing those services may increase and it is too soon to say what cost reduction there might be overall, and so what the benefit might be to investors.

A corroborative judgement would not only bring the UK’s interpretation of the management exemption more into line with the scope of exemption around Europe, but would also provide some much needed clarity on the services falling within the management exemption.”

-Ends-

For further information, please contact:
Helen Stephenson, Communications Officer, IMA, 020 7831 0898

Out of hours contact:
Mona Patel, Head of Communications, IMA, 07834 089332

Notes to Editors:
1. This exemption would apply under Article 13B(d)(6) of the Sixth Council Directive (77/388/EEC).