Following the decision earlier this year of the European Court of Justice in JP Morgan Fleming Claverhouse Investment Trust plc v. Commissioners of HM Revenue and Customs (Case C-363/05) HM Revenue & Customs ("HMRC") has announced that it has accepted that management fees for investment trusts should be treated as exempt from UK VAT.
Further details of the background of this case and the reasoning for the decision can be found in our previous e-bulletin of 3 July 2007.
Managers will broadly now be able to bring claims against HM Revenue & Customs ("HMRC") for refunds of VAT wrongly accounted for in relation to ITC management fees. A statutory limit is imposed by UK VAT law on claims for refunds of VAT accounted for in error, restricting such refunds to VAT paid in the three years prior to the refund claim in question (although there is ongoing litigation as to the question of whether this three year limit may be valid for VAT that may have been accounted for prior to the introduction of the limit in 1997).
The ramifications for individual ITCs and their managers may depend on any action taken to date in anticipation of the outcome of the litigation. For example, managers may already, in light of the Claverhouse litigation, have submitted "protective claims" to HMRC for refunds of VAT accounted for in the three years prior to the date of those protective claims. It should be expected that any such protective claims validly brought and not "time limited" in the manner discussed above will now be met by HMRC. In general terms, managers will be obliged by law to pay any sums refunded from HMRC in relation to such VAT paid to the ITCs, but the amount of the refund will be limited to the sum actually accounted for by the managers to HMRC (which will be net of creditable VAT incurred by the manager on its own purchases).
As also explained in our previous bulletin, there are complex principles of contract law underpinning the treatment of VAT sums paid wrongly by ITCs to managers under the terms of their management agreements. These principles may also be relevant to the ability of ITCs to recover VAT paid to managers, depending (potentially) upon any arrangements entered into in the manner described above.
It should be noted that the Claverhouse litigation and the ensuing HMRC announcement relate solely to ITCs. It remains possible that other forms of common investment entity could bring similar actions to claim that the benefit of the exemption from VAT should extend to encompass their management expenses.