The ECJ has today published its judgment in the case of JP Morgan Fleming Claverhouse Investment Trust plc and the AIC v HMRC. It has followed the opinion of the Advocate General as to whether or not management services provided to investment trusts should be exempt from VAT. However, the ECJ has gone further than the AG by stating that it does not consider the UK's exclusion of investment trusts from the definition of "special investment funds" to be justified, in the light of the objectives of the 6th Directive and the principles of fiscal neutrality.
It held that investment trusts (as closed-ended entities) could fall within the definition of "special investment funds". It agreed that Member States have the power to define, in their domestic law, the funds which meet that definition but that such discretion must be limited by the principles of fiscal neutrality. It stated that the purpose of the exemption from VAT was to ensure that the common system of VAT is fiscally neutral as regards the choice between direct investment in securities and investment through undertakings for collective investment. In addition, the principle of fiscal neutrality precludes entities that carry out the same transactions from being treated differently in relation to VAT and specifically includes the principle of elimination of distortion in competition. The ECJ could see no differences between an AUT, an OEIC (both of which are regarded by HMRC as "special investment funds") and an investment trust (which is not).
The ECJ held that the application of domestic legislation, which excludes the management of closed-ended investment funds from the exemption contained in the 6th Directive, is contrary to the objective of that directive and to the principle of fiscal neutrality. It remains for the national court to verify whether the application of the domestic legislation is consistent, although the ECJ has given a strong indication that the UK legislation is discriminatory and it is therefore possible that HMRC will concede the point without the need for the courts to decide.
View the briefing we prepared following the Advocate General's opinion in March 2007, summarising the key issues and arguments.