According to a recent ECJ preliminary ruling in the case of JP Morgan Fleming Claverhouse Investment Trust PLC v HMRC, an investment trust was classified as falling within the term “special investment fund” and consequently should be exempt from paying VAT on investment manager fees. The ECJ said the principle of fiscal neutrality in the EU’s Sixth VAT Directive meant that each EU Member State has a limited discretion to define what is meant by the “special investment funds” which are exempt from VAT. The issue will now be remitted to the UK VAT Tribunal for reconsideration.

Given that undertakings for collective investment in transferable securities (UCITS) are exempt from VAT on investment management fees, the ruling recognised that EU Member States also need to ensure that investment funds, directly competing with UCITS, are not put at a fiscal disadvantage. However, the question of whether the same principles could be extended to provide that UK occupational pension schemes should be exempt from paying VAT on the fees charged by external fund managers was not referred to the ECJ and is not covered by its ruling.

On reflection we consider it unlikely that the meaning of “special investment funds” will be extended to exempt UK occupational pension schemes from paying VAT to external investment managers. A UK occupational pension scheme is set up with the primary purpose of providing retirement benefits, and is not an UCITS (ie a commercial collective investment vehicle) or an arrangement in direct competition with an UCITS. However, the ultimate decision on whether the exemption applies to UK occupational pension schemes rests with the UK VAT Tribunal, whose decision could then be appealed in the courts.

In view of the fact that the point is as yet undecided, we do not think there is necessarily much merit, as suggested by some commentators, in trustees registering a protective claim with HMRC in respect of VAT which they have paid on external management fees. The danger is that trustees would probably then be obliged by HMRC to proceed with the claim and could risk having to pay HMRC’s costs if they lose. Also, there is no suggestion in the ECJ ruling of a temporal limit on claims, so a protective claim would seem to be unnecessary.