VAT exemption on fund management
Fund management services in the UK are generally exempt from VAT. This exemption aligns with the broader treatment of financial services under VAT regulations. However, the exemption is dependent on satisfying specific conditions, highlighting the intricacies of VAT legislation in the financial sector. If the conditions for exemption are not met, then the supplies are subject to UK VAT.
What is meant by ‘fund management’?
For VAT purposes, fund management is the management fee charged by fund managers, which can be deducted from the fund’s assets or charged directly to investors. Importantly, the scope of what constitutes management can also extend beyond asset management. It also includes general administrative services and delegated third-party services, provided these services collectively embody the characteristics of fund management.
Conditions for VAT exemption
The nature of the fund under management is a key criterion in applying the VAT exemption. The exemption applies to nine different types of funds. In essence, fund management services are exempt if you:
- Manage funds or collective investment schemes which are being marketed to retail investors in the UK;
- Manage UK pension funds; or
- Manage funds which are close-ended collective investment undertakings admitted to trading on a regulated market situated or operating in the UK.
It is therefore important that fund managers fully understand the nature of funds under management and how those funds are defined within UK VAT law, to determine whether its supplies are VAT exempt.
Fund management services are excluded from the list of specified supplies, which means managers making VAT exempt supplies to non-UK funds are not entitled to any VAT recovery on costs which are attributable to those supplies.
Regulatory developments
In 2023, HMRC launched a consultation aimed at simplifying the definition of qualifying funds for VAT exemption purposes. In December 2023, HMRC published its response to the consultation. The response failed to address a number of points that respondents to the consultation had raised, and which could have significantly clarified the VAT legislation as it applies to UK fund managers. Instead, the only change to the position of fund managers is that from 1 January 2024, UK fund managers will no longer be able to rely on the EU VAT law applying to their services. This is significant as the EU law has traditionally been drawn more widely that the UK legislation and may limit the ability of UK fund managers to rely on VAT exemption for their services.
Seeking professional VAT advice
Given the complexities involved in identifying eligible exemptions, fund managers are encouraged to seek professional VAT advice. As the sector anticipates regulatory, strategic VAT compliance and planning is becoming increasingly vital. Fund managers are advised to stay informed about legislative developments and seek expert guidance to ensure compliance and optimise their VAT position.
For further advice on any of the above, contact Dougie Todd, Partner and Co-Head of VAT.