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.