A welcome and exciting opinion
On 8th September 2005, the German Advocate–General Julianne Kokott delivered her opinion in the Abbey National fund management case at the European Court, on the VAT liability of fund depositary and administration charges. The Court has now to give its final judgment, but if the AG's opinion is followed, there are important implications for the funds and wider outsourcing industry.
Questions to the Court
The Court was asked:
- Whether the Member State had the power to define both the type of funds eligible for exemption, and define what constituted management for the purpose of the VAT exemption in Article 13 B(d) 6 of the VAT 6th Directive ?
- Whether VAT was due on depositary charges?
- Whether VAT was due on sub-delegated administration?
The Luxembourg Hearing
CMS Cameron McKenna acted for Abbey National and put together a multi-national legal team of UK, French and Belgian lawyers, including Professor Melchior Wathelet, former judge at the ECJ. In the hearing, the Commission took the side of the UK, and argued for a narrow definition of sub contracting. However, the Advocate-General asked the UK what was the practical effect of the exemption on so narrow a view. To the Abbey side she simply asked where she thought we should draw the line as between taxation and exemption.
The Opinion
This Opinion takes a much VAT-friendlier view of outsourcing, as compared to previous hard line decisions in the insurance sector. The proposed answers to the questions are:
- Management is a term of community law and therefore cannot be left to the Member States to define. This follows precisely the line of argument in the previous Abbey National VAT Tribunal case, concerning the VAT liability of sub-delegated fund investment management.
- Depositary services are part of management, because the depositary is active, and can intervene. He protects the investments and the activity is specific to the management of a fund. Only where safekeeping were to be the predominant activity would the exemption not apply.
- (Administration of a fund, where it forms a distinct whole and is essential and specific to fund management, is also VAT exempt. The test of distinctiveness is the extent of the outsourced services and the inner coherence of the operations outsourced, so that valuation and the keeping of records and accounts are made essential and specific.
Consequences of the Opinion
The Opinion has important implications if followed in the judgment
Specifically
The level of VAT charges in the funds industry will reduce, both to investors, via the depositary charges, and to fund managers who sub-contract administration, such as those providing specialised Net Asset Valuation platforms.
The Advocate General adopted the arguments by Abbey, that interpretation of Article 13B (d) 6 had to be by reference to the language of the provision, i.e. management, and not importing concepts such as exploitation or legal and financial charges, which were more specific to transactions concerning payments and securities.
Generally
The court may be taking a more friendly view of sub-contracting going forwards in policy terms. This can only be good news, and possible grounds to take a further case in the insurance sector, particularly if HMRC take a hard line over implementing the Arthur Andersen decision.
The court did adopt the definition of a depositary in the collective investment directives, because it is a creature of regulation.
The court refrained however from looking at other directives as regards administration, and applied the legal test, modified as required for management, of exemption for an operation that amounts to a distinct whole that is specific and essential to management.
Further Action
CMS Cameron McKenna will hold a funds update seminar at the time of the ECJ's judgment, dealing with what will and will not be exempt going forwards, together with issues such as back claims and irrecoverable VAT. We will also look at why the new policy strand on efficiency in outsourcing could now be brought back into other sectors such as insurance so as to widen the exemption again. In the meantime all protective claims should be made, by depositaries/ trustees, and by fund administrators for such services related to collective investment schemes where VAT has been charged.
CMS Cameron McKenna can provide a wide range of advisory and litigation services on funds and VAT. If you have a VAT issue or would like an initial without obligation discussion on the VAT position you are in or wish to get to, or a review of your contractual position, please contact:
