UK: Abbey VAT case on fund administration: judgment delivered

On Thursday 4 May 2006, the ECJ delivered its judgment in Abbey National Plc and Inscape Investment Fund (joined party) v HM Commissioners of Revenue and Customs (C-169/04). The Court has ruled that although depository services remain taxable, administration services will now be exempt from VAT.

Given the large size of the EU funds industry and the scale of administration services that are outsourced, the judgment means that millions of pounds are likely to be saved by fund providers in the future.

The Court also ruled that the definition of "funds management" for collective funds will be standardised across the European Union, meaning that countries such as Luxembourg, Ireland and France will no longer be exempt from VAT on depositary services.

CMS Cameron McKenna LLP advised Abbey on the case, which looked at the scope of the exemption for management services of special investment funds and more specifically at the interpretation of Article 13B (d) 6 of the VAT 6th Directive.

Peter Mason of CMS Cameron McKenna LLP, who led the team advising Abbey said: "This was a much awaited judgment. A serious fiscal obstacle to efficient outsourcing will be removed and this will further open Europe up as a market for the funds industry.

"This will affect both UK and overseas businesses involved in the funds industry and they will need to look carefully at what the implications of this outcome are for them and to what extent they, or their service providers, may be entitled to VAT exemptions.

"Time bars and limitation periods against HMRC and between recipients and providers will need to be considered as will dealing with irrecoverable input tax."

On Thursday 4 May 2006, the ECJ delivered its judgment in Abbey National Plc and Inscape Investment Fund (joined party) v HM Commissioners of Revenue and Customs (C-169/04). The Court has ruled that although depository services remain taxable, administration services will now be exempt from VAT.

Given the large size of the EU funds industry and the scale of administration services that are outsourced, the judgment means that millions of pounds are likely to be saved by fund providers in the future.

The Court also ruled that the definition of "funds management" for collective funds will be standardised across the European Union, meaning that countries such as Luxembourg, Ireland and France will no longer be exempt from VAT on depositary services.

CMS Cameron McKenna LLP advised Abbey on the case, which looked at the scope of the exemption for management services of special investment funds and more specifically at the interpretation of Article 13B (d) 6 of the VAT 6th Directive.

Peter Mason of CMS Cameron McKenna LLP, who led the team advising Abbey said: "This was a much awaited judgment. A serious fiscal obstacle to efficient outsourcing will be removed and this will further open Europe up as a market for the funds industry.

"This will affect both UK and overseas businesses involved in the funds industry and they will need to look carefully at what the implications of this outcome are for them and to what extent they, or their service providers, may be entitled to VAT exemptions.

"Time bars and limitation periods against HMRC and between recipients and providers will need to be considered as will dealing with irrecoverable input tax."

The ECJ judgment in Abbey’s funds case was a little unusual in that it differed from the earlier Advocate-General’s opinion. Whereas the Advocate-General found in favour of Abbey on all the questions asked, the ECJ awarded Abbey a slightly narrower victory, finding in its favour on two out of the three questions.

The judgment went in favour of Abbey by ruling that management services had a community law meaning and that administration services could fall under the banner of management services and therefore qualify for exemption from VAT under article 13B(d)(6) of the Sixth Directive. This is not to say that all administration services will necessarily qualify as management services. In order to qualify for exemption administration services must contain certain essential elements. Broadly speaking these are set out in the UCITS directive (85/611) annexe II. Although the case must still go back to the UK for the ECJ judgment to be applied, we feel that it is now very unlikely that HMRC will contest that the services received by Abbey qualify for exemption.

Depositary services on the other hand are apparently services of supervision rather than management and so remain standard rated. In this respect the court departed from the Advocate General’s opinion. We find the court’s distinction between supervision and management difficult to justify, but the ECJ decision is final, so we are stuck with it unless and until another case is brought which restricts the scope of this judgment.

Immediate implications of the case

The immediate implication is that administration services which contain the required ‘essential elements’ are exempt. This means that going forwards providers of these services should not charge VAT. This should result in significant savings for fund providers. A word of caution though. Care will be needed to ensure that the services being provided are those which can qualify for exemption. This will require planning and careful drafting. The change could also require redrafting of certain provisions of existing agreements regulating the administration services. Please contact us to ensure that your existing and new contracts make the most of the ECJ’s decision.

The judgment also means that VAT should never have been charged on these administration services. This opens up the possibility of claims by funds to recover VAT wrongly charged. Each case will depend on the particular facts of the services provided and on the wording of the contracts for the provision of these services. We can assist you in deciding whether a claim is appropriate and if so in the conduct of that claim.

The flip side of the exemption coin is that providers of administration services may now incur irrecoverable input tax. It is possible that such providers may face claims by HMRC for input tax which should never have been recoverable. We will have to wait for HMRC’s reaction to the judgment before we know the government’s position, but please contact us if you need advice on how to respond to a claim or if you wish to discuss the likelihood of a claim by HMRC being made against you.

Further reaching implications

The reasoning behind the judgment may also have implications beyond the exemption of administration services. For instance it is possible that services of marketing may also be eligible for exemption as management services. This opens up some exciting possibilities for funds that are currently incurring VAT on such services.

There is also hope for outsourcing generally since the court implicitly accepted that businesses which choose to outsource should not be discriminated against because of their choice. So the tendrils of the decision may reach into other industries such as insurance.

As far as depositary services go, it is very much a case of as you were in the UK. However, other European jurisdictions such as Luxembourg with a longstanding history of exempting these services will now be obliged to amend their domestic practice. The result should be to harmonise practice across Europe, resulting in a level playing field for funds, as envisaged by the UCITS directives.

As the legal team behind the Abbey case, CMS Cameron McKenna are in a unique position to provide a wide range of advisory and litigation services on the implications of the decision for funds. If you have a VAT issue or would like to discuss your VAT position, please contact one of the authors of this article.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 08/05/2006.