Extension of the scope of the UK VAT exemption for managing certain funds and pension schemes

The scope of the UK VAT exemption for managing certain closed-ended investment schemes and pension funds has been widened with effect from April 1, 2020.

The change incorporates principles established by a number of decisions taken by the Court of Justice of the European Union (CJEU) that were not reflected in the UK legislation. First, the exemption will apply to the management of certain defined contribution pension schemes and second, the exemption for closed-ended listed special investment funds (SIFs) will no longer require that they invest “wholly or mainly in securities”. The exemption will therefore apply to SIFs investing in property, commodities, intellectual property and other assets not considered to be securities.

The significance of this change is that previously managers providing services to these categories of pension scheme and fund had a choice as to whether to charge VAT on management fees or to rely on the direct effect of EU law to treat the supply as exempt. With effect from April 1, 2020, they will no longer have a choice; the services they provide will be exempt.

Managers who are treating management services as subject to VAT will need to consider whether their position is impacted by this change. This may not be a straightforward exercise, particularly in the case of defined contribution pension schemes where the test is based on the characteristics of the scheme.

Where the supplies are now exempt this may then have a knock-on effect on the manager’s VAT recovery position and managers will need to consider their ability to pass any additional cost on to their clients under the relevant management agreements.