VATFIN5280 - Management of investments, portfolios, funds, ‘wrapper’ products and related services: VAT exemption for the management of open-ended collective investment schemes: de minimis provision

In the case of a recognised overseas scheme, or a sub-fund of a recognised overseas umbrella scheme, the law exempts the management where units in the scheme or sub-fund have been, or are, marketed to UK retail investors. However, there may be funds/sub-funds which have been marketed to UK retail investors in the past and are FSA ‘recognised’, but for which there was little take-up (so only a small proportion of units in the fund are held by such investors) and which are no longer actively marketed.

A de minimis provision therefore applies whereby schemes (or sub-funds of an umbrella scheme) which have been marketed to UK retail investors but are no longer so marketed, are not covered by the VAT exemption if less than 5% of their shares or units are held by UK retail investors at the time that active marketing ceases. Note (6A) to Group 5 contains this de minimis provision and also makes it clear that schemes or funds/sub-funds which have never been marketed in the UK do not fall within the exemption.

For the purposes of applying the de minimis provision, shares held by UK institutional investors are not included in the calculation of the proportion of shares or units held by UK retail investors.

If at the time that active marketing ceases more than 5% of the shares or units in the fund/sub-fund are held by UK retail investors, the management of the fund/sub-fund falls within the exemption. If at any future point the level of investment by UK retail investors falls below 5%, the management of the fund/sub-fund will be deemed to fall outside the exemption from then on, unless and until a decision is taken to resume active marketing.

Given the degree of intermediation in the retail market, there are significant practical challenges for fund managers in identifying retail investors in a fund/sub-fund. It is accepted that the assessment of the percentage of UK retail investors can necessarily be done only on a best efforts basis. By way of example, a fund’s/sub-fund’s share register may contain the details of some individual investors but many retail investors’ shares may be held in nominee accounts of distributors and only the nominee names will appear on the register. It is reasonable to accept the location of the activity of a retail distributor as a proxy for the location of the underlying retail investors.

Funds/sub-funds which were not actively marketed as at 1 October 2008 and afterwards will still fall within the exemption if more than 5% of their shareholders are UK retail investors (under a best efforts calculation). In such a case, the fact that there are more than 5% UK retail investors suggests that the fund/sub-fund has been actively marketed in the UK and so its management will be exempt. However, if it can be demonstrated that the fund/sub-fund has not been actively marketed since the UCITS Directive came into effect in 1988 (before which overseas funds were not ‘recognised’ as now) then it will not qualify for the exemption.