HM Revenue & Customs (HMRC) has issued a Business Brief which affects the ability of investment managers to make claims for the output tax that they mistakenly charged investment trusts on their fees.

The Business Brief concedes that both input and output VAT claims may be made in relation to VAT accrued or paid before the introduction of the defective three year caps on 4 December 1996 (for output tax) and 1 May 1997 (for input tax). In conjunction with the decision in the Claverhouse case (please see below for link to our briefing on this case), this means that managers of investment funds may now make claims for the output tax that they have wrongly accounted for in the period from 1990 to 1996. In 1996, the Government introduced a time limit for claiming overpaid VAT to three years. A similar three year time limit was also introduced for input tax in 1997. Both provisions took effect immediately and were introduced with no transitional period to allow claims to be made for a limited period under the old rules. The House of Lords has found in the cases of Michael Fleming v HMRC and Condé Nast Publications v HMRC that the absence of the transitional arrangements was in breach of Community law and the three year cap should be disapplied for input tax claims.

HMRC has announced that it considers the reasoning in the judgment in the Fleming and Condé Nast cases should also apply to claims to recover output VAT overpaid or overdeclared in the period up to 4 December 1996, and valid claims may now be submitted.

The effect of the decision in the Claverhouse case is that the exemption from charging VAT on services provided to AUTs and OEICs into national legislation on 1 January 1990 should be extended to management services provided to investment trusts. Following the recent HMRC Business Brief, it is now clear that investment managers can make claims for the output tax that they erroneously charged investment trusts in the period from 1990 to 1996. Although claims for the periods after 1996 and 1997 are now the subject of further litigation, it seems unlikely that this will succeed.

For investment managers this Business Brief means that any output tax mistakenly charged to investment trusts in the period from 1 January 1990 to 4 December 1996 can be recovered. Any future claims may be subject to a cap, details of which have yet to be announced by HMRC.

View the briefing we prepared following the ECJ’s decision in the case of JP Morgan Fleming Claverhouse Investment Trust plc and the AIC v HMRC