How Can Fund Managers Navigate a Minefield of VAT Regulations?

UK fund managers must comply with a complex array of VAT regulations concerning the VAT liability of their services. Understanding the VAT position of UK fund managers can be complicated and requires analysis of both the services being provided, and the nature of the funds receiving the management services. So what are the key considerations to beware of for fund managers trying to navigate this important topic?

What is meant by ‘fund management’?

For VAT purposes, fund management is the management fee charged, whether 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.

VAT exemption on fund management

Fund management services in the UK are generally exempt from VAT. This aligns with the broader VAT treatment of financial services. However, the exemption is dependent on specific conditions and, if these are not met, the supplies may be subject to UK VAT – this could create a cost for UK resident funds but allow VAT recovery for the UK managers.

If the services do meet the criteria for VAT exemption, no VAT arises for the funds on the services, but the UK fund manager will not be able to recover all or some of the VAT it incurs.

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 which are listed in the UK VAT legislation. In essence, the supplies of management services, as defined above, are VAT exempt if you:

• Manage funds or collective investment schemes which are being marketed to retail investors in the UK
• Manage UK pension funds
• 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. This means that managers making VAT exempt supplies to non-UK funds are not entitled to any VAT recovery on costs which are attributable to those supplies. This is something which suppliers of other financial services can do. 

Legislative developments

In 2023, HMRC launched a consultation aimed at simplifying the definition of qualifying funds for VAT exemption purposes, publishing its response in December. Following this, the only change to the position of fund managers is that, from 1 January 2024, UK fund managers are no longer able to rely on EU VAT law applying to their services. This is significant, as EU law has traditionally been drawn more widely than the UK legislation and may limit the ability of UK fund managers to rely on VAT exemption for their services.

HMRC’s response stated that the ‘vast majority’ of fund types were covered by the existing VAT legislation. However, this clearly implies that some fund types are not covered and may not meet the conditions for VAT exemption.

It has been suggested (but not confirmed by HMRC) that some fund types which arguably are not covered by the existing rules will, almost by concession, be treated as exempt funds. This includes funds such as model portfolio funds which the industry has largely been treating as exempt over the past few years.

There were further issues which had been raised by several respondents which HMRC’s response did not address. For example, respondents requested a wider definition of ‘management’ to include outsourced services or supplies of technology which could meet that definition. However, HMRC stated that there was sufficient legal certainty on these issues and no further definition was required.

Finally, and unsurprisingly, HMRC did not comment on a few suggestions to introduce a VAT zero-rate for supplies of fund management to UK resident funds. This would have allowed UK fund managers to recover VAT on their UK costs without disadvantaging the funds, by creating an irrecoverable VAT cost for them. This would have been in line with some EU Member States and therefore allowed UK fund managers to remain competitive with managers in other territories. However, HMRC appears to have given this argument short shrift.

In summary, the VAT position of UK fund managers is complicated and HMRC’s current position remains unclear on several issues which could make the exemption clearer. Managers should regularly review their VAT position and consider seeking advice now on the back of the HMRC consultation process, or if the services they provide or the nature of funds under their management change.

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Dougie Todd is Co-Head of VAT at haysmacintyre

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The views expressed in this article are those of the author and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group