ECJ rules groups can outsource free of tax

British fund management groups no longer have to pay value-added tax when outsourcing any of their fund administration management services to third-party providers. This follows a ruling earlier this month by the European Court of Justice after a case brought by Abbey National against HM Revenue and Customs.

Unlike in most of Europe, where groups pay no VAT on outsourced fund management administration services, British fund houses have to pay VAT to have an external party run funds for them.

According to the Investment Management Association, the ECJ ruled in favour of Abbey, because “management” was defined under European legislation under the Ucits directive. Accordingly, it said it was not up to local authorities (HMRC) to define what “management” means or who provides the service and, as a result, like most of Europe, British groups should not be forced to pay VAT.

A spokesperson for the IMA, says: “We are pleased the UK fund industry is now on a level playing field in terms of delegating their services to a third-party administrator. We will liaise with the Revenue after looking at the details of the ruling as to what services are exempt and how the judgment will be applied in the UK.”

According to the ruling, the VAT- exempt services include fund accounting, pricing, fund registrars, and marketing. The IMA is looking into the process of reclaiming money from the Revenue by affected members.

Mark Seaman, principal consultant at Etheios, an independent investment management consultant, says: “The ruling has wide implications as previously the VAT payable on outsourced fund administration effectively encouraged fund managers to carry out administration in-house. Now activities such as transfer agency [fund registrar] and fund accounting can be outsourced on a level playing field. This case promises to save the industry millions of pounds a year.”

However, while Abbey won its case to get VAT exemption on fund administration services, the ECJ ruled in the same case against VAT exemption on depositary services.

Like fund administration services, in most of Europe depositary services are VAT-exempt. It is unclear whether this exemption in Europe will continue in the future.