Taxman digs in over close-ended funds

The fierce battle between fund managers and HM Revenue & Customs over the
VAT payable on management fees of close-ended funds is set to run to the bitter
end as the taxman digs in to defend its position to the hilt.

At the end of June the fund management industry was celebrating a landmark
victory in the European Court of Justice as the JP Morgan Fleming Claverhouse
Trust and the Association of Investment Companies won a bid to exempt management
fees for close-ended funds from VAT.

Under EU rules member states are left to decide what special investment funds
qualify for VAT exemption, but have to ensure that they do not discriminate
against certain types of funds unfairly.

When making its ruling the ECJ said that UK rules blocking close-ended funds
from VAT exemption, while allowing other funds to claim the benefit did ‘not
appear justified’.

Despite this verdict, HMRC has indicated that it will wait until the very end
of the litigation process before paying out any claims for overpaid VAT.

In a recently released business brief HMRC makes it clear that it will not
make any payments until the process has run its course.

‘We have received a number of claims for overpaid VAT since the (JP Morgan
Fleming Claverhouse) litigation began in 2004. The claims concerning such
services have been held over pending the final outcome in the litigation, and
will be addressed in due course,’ the brief says.

This means that all claimants will have to wait until a VAT Tribunal
determines how the ECJ decision should be interpreted before receiving a cheque
from the taxman.

Although the case looks to be going in the fund managers’ favour, the
champagne will have to stay on ice for a while yet as HMRC fights its corner.

Indeed, it should come as no surprise that HMRC has not simply rolled over
and begun paying out claims following the ECJ’s June verdict.

Firstly, the amounts at stake are significant. According to tax consultants
Chiltern investment trusts alone are in line for repayments of £40m in overpaid
VAT.

Secondly, throughout the various group litigation orders and ECJ challenges
it has faced, HMRC has made it clear that it will fight fiercely for its ground
by running as many lines of argument as it can and pursuing all cases right to
the very end of the litigation process.

JP Morgan Fleming Claverhouse looks to be no different.