IMA’s submission to the European Commission’s consultation "Modernising VAT obligations for financial services and insurances" highlights a number of industry concerns over VAT related issues.

The current lack of certainty over VAT has led to a number of court cases in the national and European courts¹. Not only does this mean that policy is effectively being determined by the court rather than by legislation, but also the retrospective effect of court cases increases uncertainty for companies, their suppliers and their customers. Moreover, even in areas where there has not been a court case, companies increasingly find they must debate VAT treatment with the fiscal authorities on a case by case basis. This, too, adds to uncertainty and costs.

In its response, IMA has called for certainty and consistency over the VAT treatment of financial services and has emphasised the need for appropriate transitional periods if changes to the legislation are implemented.

The response also makes a number of key recommendations which include:

"Special investment funds" exemption – there needs to be clarity about what is meant by the term "special investment funds": what types of vehicle fall within this particular exemption and what management of them means. IMA recommends that the exemption should clearly apply to the functions of management, whoever supplies them, allowing for the exemption of the outsourcing of functions which are specific to and essential for the management of UCITS and other vehicles falling within the exemption, as highlighted by the Abbey National case¹.

Intermediary exemption – all transactions carried out via intermediaries should be exempt from VAT. Currently a VAT exemption exists where a transaction is carried out between an intermediary and a management group. However, where products are being increasingly intermediated, with more than one level of intermediary involved (e.g. IFA transactions through fund supermarkets), the VAT situation is unclear. If the situation remains unresolved this could contribute to an inconsistency of treatment of European investors, with investors being impacted differently if they are charged on the basis of commission or fees, and depending what channel they use to transact their investment.

Cross-border VAT bodies – IMA has encouraged the Commission to engage in further discussions of the feasibility of cross border VAT groupings, where such groupings may comprise companies, partnerships, natural persons and other entities. An immediate issue to resolve is the treatment of cost sharing arrangements across financial services groups, as the current provisions do not work in practice.

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

"The status quo on the EU VAT legislation is simply not tenable. The current situation gives rise to unacceptably high levels of uncertainty and the risk of retrospective financial impacts. There is a clear need for closer alignment of Member States’ implementation and interpretation of the rules in order to ensure that administrative and legal costs remain small relative to tax take. Amendments to the legislation are necessary in order to improve consistency and certainty for financial services companies, but such changes must be coupled with appropriate transitional periods to allow companies, their suppliers and their customers to adjust." 

A copy of IMA’s submission is attached.

1. An example of such a case is the Abbey National versus HM Revenue and Customs case (C-169/04) regarding the VAT treatment of administrative and depositary fees. The European Court of Justice ruled in favour of Abbey that fund administration, no matter who provides it, should be exempt provided that the services being supplied are essential for and specific to the management of the fund. The ruling is attached. We await confirmation of consequential changes to UK policy, but it is clear that there will be back claims for VAT already paid to HMRC, for at least three years.

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