Two recent decisions of the European Court of Justice (“ECJ”) on the VAT treatment of investment management services illustrate that this is still an area of some uncertainty that is continuing to evolve. The first decision, in the GfBk case 1, looked at the nature of the services that benefit from VAT exemption and held that fund investment advisory services could benefit. The second decision, in the Wheels case 2, looked at whether a pension scheme was a special investment scheme for VAT exemption purposes and held that it was not.


Investment funds do not usually have the right to deduct VAT and so any VAT incurred is a cost which affects their net return on investment. The VAT Directive3 provides a specific VAT exemption for the management of "special investment funds", with EU member states allowed to define which funds qualify. Most EU member states limit the application of the exemption to regulated funds. For instance, in the UK, OEICS and Authorised Unit Trusts ("AUTs") qualify, as do, after the ECJ decision in JP Morgan Fleming Claverhouse Investment Trust plc, investment trusts. In the Netherlands, however, management of all collective investment funds – both regulated and non-regulated – is exempt from VAT. In Ireland, regulated funds as well as capital markets issuers and Section 110 finance companies are entitled to the VAT exemption.

In the Abbey National case 4, the ECJ had clarified that the VAT exemption applied to all services which are "specific" to the management of an investment fund. If management services are delegated to a third party, the delegated services should benefit from the VAT exemption as well, provided they are distinct, specific to and essential for the management of the investment fund. In other words, the exemption did not just apply to the investment manager.

The GfBk case

In this case, a third party adviser provided fund investment advisory services to a German investment management company (“IMC”) managing a contractual investment fund. The IMC checked the recommendations and then implemented them. The German VAT authorities claimed that these services could not benefit from the VAT exemption for fund management services as these  were advisory in nature. The question was referred to the ECJ.

The ECJ held that fund investment advisory services which are intrinsically connected to the activity characteristic of an IMC and are specific to, and essential for, the fund, could benefit from the VAT exemption for fund management services, whether delegated to a third party or not. Here the advisory services were of such an intrinsic and essential character and were therefore exempt. The fact that the investment adviser took no decisions for the investment fund was irrelevant because the supplies were “specific and essential” to the functions of the fund. The ECJ also stated that the fact that advisory and information services are not listed in Annex II of the UCITS Directive under the heading "management" of an investment fund, did not preclude their inclusion in the "management of a special investment fund", since this Annex II itself states that the list is "not exhaustive".

The Wheels case

The Wheels case involved the supply of investment management services by fund managers to a number of funds in which the assets of different occupational pensions (which were all defined benefit occupational schemes) were pooled for investment purposes. The fund managers sought to recover VAT previously accounted for on supplies to the pension funds. HM Revenue & Customs (“HMRC”) denied the claim and the matter was referred to the ECJ.

The appellants argued that an occupational pension scheme fell within the definition of a “special investment fund”, being a fund in which a number of persons (here the employees and employers) pool their investments and which generates a return from a spread of investments. HMRC argued that as each of these schemes involved defined benefit schemes, so the benefits received by employees depended on length of service and salary, rather than investment returns. Accordingly, such funds were fundamentally different to “special investment funds” whose returns depended upon the amount invested, the performance of the fund and any fund charges. HMRC further argued that such funds were not open to the public, but rather were limited to providing benefits for employees.

The ECJ noted that the purpose of the VAT exemption was to facilitate investment in securities by excluding the cost of VAT and so ensuring that VAT is neutral as between direct investment in securities and investment through collective investment undertakings. Further, collective investment schemes, such as OEICs and AUTs, have as their objective the collective investment in securities of capital raised from the public. In contrast, the ECJ stated that the defined benefit pension schemes were not open to the public, but were an employment related benefit, and further that members of the scheme did not bear the risk arising from the management of the investment fund, since their pension was based on length of service and final salary.

The ECJ thus held that a defined benefit retirement pension scheme does not qualify as a special investment scheme and so the management of such a scheme does not qualify for VAT exemption.


The GfBk case illustrates that services other than pure investment management may come within the VAT exemption if, as in this case, it can be demonstrated that the services are specific and essential to the fund. Apart from advisory services it is possible for other services to be within the scope of the exemption, such as risk monitoring of the fund.

Investment advisers who have been charging VAT on their services, and recovering related input VAT, should now consider if their services should be exempt from VAT and if so the impact on their VAT recovery. Funds which have been charged VAT may be able to recover it from their providers, or from the tax authority if VAT has been accounted for on a reverse charge basis.

Meanwhile there may be some scope for defined contribution pension schemes to argue that they qualify for the exemption, as the employee participants do take on the economic risk of the performance of the funds. However, as such funds are only open to a limited number of employees, this may prove a fatal stumbling block.