The Advocate Generas opinion indicates that UK VAT may be correctly chargeable on management services for investment trusts, but only if the UK has not ignored the principles of fiscal neutrality in exercising its discretion to exclude investment trusts from the definition of  special investment funds. Broadly, the issue referred to the European Court of Justice (ECJ) was whether or not the UK domestic legislation correctly implemented the intent of the Sixth Directive in relation to the exemption from VAT for management services provided to special investment funds. The Advocate Generals opinion provides that while investment trust companies, as closed-ended entities, can be special investment funds, it is for each Member State to decide, in line with the general principles of the Sixth Directive, which funds will fall within that category. The Advocate General said that as investment trust companies are comparable to existing funds which enjoy the exemption, their management should also be exempted from VAT. However, the discretion rests with the UK Government, and the question is now whether the UK has exercised that discretion correctly.

Background to the case

The law

  • The management of “special investment funds” is exempt from VAT (Article 13B(d)(6) Sixth Directive).
  • Schedule 9 Value Added Tax Act 1994 implements this exemption for authorised unit trusts and open-ended companies, but not for investment trust companies.

Facts and questions referred to the ECJ

  • JP Morgan Fleming Claverhouse Investment Trust plc, an investment trust company, appealed to the VAT and Duties Tribunal (the Tribunal) against the charge of VAT on the supplies of fund management services which it receives. The case , brought jointly with the Association of Investment Companies, was referred by the Tribunal to the ECJ in September 2005.
  • The questions referred for a preliminary ruling were:
  1. Can “special investment funds” in Article 13B(d)(6) include closed-ended investment funds, such as investment trust companies?
  2. If so, does the phrase “as defined by Member States” in Article 13B(d)(6):
    • allow Member States to select certain of the “special investment funds” within their jurisdiction to benefit from the exemption of the supply of management services and exclude others from the exemption; or
    • does it mean that the Member States must identify those funds within their jurisdiction which fall within the definition of “special investment funds” and that the benefit of exemption should extend to all such funds?
  3. If the answer to the second question is that Member States can select which “special investment funds” benefit from the exemption, how do the principles of fiscal neutrality, equal treatment and the prevention of distortion of competition affect the exercise of that discretion?
  4. Does Article 13B(d)(6) have direct effect?

The Advocate Generals opinion

The phrase management of special investment funds is not defined in the Sixth Directive. The recent ECJ case of Abbey National held that the question of what constitutes management  is solely one of Community law. By contrast, Member States do have the discretion to define which special funds will qualify, and which will not. As a result, the application of the Sixth Directive may differ from Member State to Member State, but the discretion enables Member States to tie the exemption into compliance with other standards laid down in the national law. This discretion is, however, limited first by the wording and purpose of Article 13B(d)(6) itself, and second by the requirement that the Member States must observe the principles underlying the Sixth Directive, such as the neutrality of VAT.

The Advocate General found no obvious relevant differences  between closed-ended funds and other investment funds established by statutes, such as open-ended investment companies, which would preclude closed-ended funds from falling within the meaning of Article 13B(d)(6). The answer to the first question is that investment trust companies can be special investment funds.

The second and third questions were considered together. The concept of a special investment fund is not a legal concept in the UK, and the fact that a form of investment is recognised as an investment fund under national law will not be enough to infer that such a fund is also a special investment fund. Therefore, an investment trust company, as an investment fund, will not automatically be a special investment fund. Instead, the question is whether the UK correctly exercised its discretion in not extending the exemption to include the management of investment trust companies.

When trying to answer that question, the wider objectives of the exemption (such as to avoid making access to that form of investment more difficult for small investors) need to be considered. A Member State may exclude funds, but this exclusion must be consistent with the principle of fiscal neutrality. Broadly, this means that economic operators who carry on similar activities should not be treated differently so far as VAT is concerned, so as not to distort competition. The Advocate General said that the decisive factor was the comparability of the investment funds whose market position may affect the tax burden on the fund, and confirmed that investment trust companies are comparable to the types of fund that are entitled to the exemption. Unequal treatment would therefore only be permissible if the different types of fund did not serve in the same way to achieve the objectives of the exemption.

The Advocate General considered that it would be consistent with the objectives of the Sixth Directive for the Member State to take into account the extent to which investor protection is ensured. The question of whether an investment trust company provided a similar level of investor protection to that afforded by authorised investment trusts and open-ended investment companies was left for the Tribunal to decide.

The answer to the second and third questions is therefore that Member States do have the power to determine which funds get the benefit of the exemption from VAT on management services but that, in exercising that discretion, regard must be had to the wording and objectives of the Sixth Directive and therefore competing special investment funds should be treated equally as far as VAT is concerned.

The Advocate General found that Article 13B(d)(6) does have direct effect, so that taxpayers can rely on it directly, where, in breach of the principle of fiscal neutrality, the national legislation does not provide an exemption from VAT.


Although the opinion of the Advocate General is just that, an opinion, and does not bind the ECJ in any way, it is a useful indication of the way in which the case will be decided. However, this opinion is encouraging for the investment trust industry in that it has supported virtually all of the arguments raised by the appellant company. The Advocate General has given a strong indication that, as investment trust companies are comparable to the types of fund which currently enjoy the exemption from VAT, their management should also be exempted from VAT. The main caveat is that she has explicitly left the door open to a possible justification of treating investment trusts differently due to a lower level of investor protection when compared to authorised unit trusts and open-ended investment companies (which are required to be authorised by the Financial Services Authority).