VAT Treatment of fund management services


Back in December 2023, HMRC finally released a summary of the responses regarding changes to the VAT treatment of fund management services proposed in a technical consultation published at the end of 2022. The purpose of the consultation was to:

  1. Improve policy clarity and certainty for all stakeholders on the application of the VAT exemption for fund management services; and
  2. Remove reliance on retained EU law in the wake of Brexit.

It aimed to do this by:

  • Clearly classifying in legislation what was meant by the term “Special Investment Fund” (SIF) in respect of the VAT treatment of fund management services, and

  • Retain the current list of exempt fund types listed under items 9 and 10 of VATA 1994, Schedule 9, Group 5

So what was the published response, and what is the position now?

First, let’s back-up and summarise exactly what the VAT treatment of fund management services was and where it came from.


U.K. legislation regarding the VAT treatment of fund management services is derived from the EU Principal VAT Directive (PVD) Article 135(1)(g) which provides for a VAT exemption of the management of funds known as Special Investment Funds (SIFs). However, there is no definition of what a SIF is within the PVD, hence it has been left to individual EU Member States to determine this within the bounds of EU law. In the U.K. any management of funds that does not qualify as a SIF is subject to VAT at the standard rate (currently 20% at the time of this writing this article).

To summarise, with no clear definition within the PVD, U.K. law has provided guidance in the form of a list under items 9 and 10 of VATA 1994, Schedule 9, Group 5 of the types of funds of which management is exempted from VAT:

9. The management of:

  • An authorised open-ended investment company; or
  • An authorised contractual scheme; or
  • An authorised unit trust scheme; or
  • A Gibraltar collective investment scheme that is not an umbrella scheme;
  • A sub-fund of any Gibraltar collective investment scheme; or
  • An individually recognised overseas scheme that is not an umbrella scheme:
  • A sub-fund of any other individually recognised overseas scheme; or
  • A qualifying pension fund.

10. The management of a closed-ended collective investment undertaking.

U.K. taxpayers could also rely on the direct effect of EU law, meaning that if the fund being managed was not on the above list, but was similar enough to a fund where the CJEU had ruled it was a SIF then management of such a fund could also benefit from being exempt from U.K. VAT.

The lack of a definition in existing legislation makes it difficult for HMRC to consistently apply the SIF exemption, hence post Brexit it was proposed that the government seeks to reform the legislation with the aim of providing increased certainty to fund managers in the form of a consultation. As part of the 2020 Spring Budget, it was announced a consultation would take place.

 Proposed changes of the December 2022 consultation

The U.K. Government set out the following proposed changes in the legislation for consultation:

  1. To establish the U.K. VAT liability of a supply of fund management without requiring reference to other sources of case law and guidance. In other words, provide a single source of law regarding the VAT liability of a supply of fund management services.

  • To not significantly change the VAT treatment for current fund managers who rely on U.K. legislation or the direct effect of EU law.

  • To adopt into legislation the following criteria for a fund to be considered a SIF:
    • The fund must be a collective investment;
    • The fund must operate on the principle of risk-spreading;
    • The return on the investment must depend on the performance of the investments, and the holders must bear the risks connected with the fund; and

    • The fund must be subject to the same conditions of competition and appeal to the same circle of investors as a UCITS (Undertaking for Collective Investment in Transferable Securities), that is funds intended for retail investors.

The published response

It was noted that the respondents to the consultation welcomed the government’s approach and agreed that retaining items 9 and 10 would provide greater clarity and reduce uncertainty. It was suggested a definition of the term “management” could provide greater clarity, however in response the government felt that sufficient clarity is provided by settled case-law.

Respondents voiced concerns that areas of uncertainty would remain, a key concern being that the proposed SIF criteria is vaguer than items 9 and 10, and it would be difficult to apply to some funds that currently fall within the VAT exemption under items 9 and 10. Most respondents rely on these items to determine VAT treatment hence in response to this, the government accepts that a list-based approach is the most appropriate.

The majority of respondents called for the government to broaden the proposed scope of the fund management exemption to include other types of marketed funds, and to include Outsourcing and reflect the use of modern-day technology widening the scope of the exemption to include IT-centric Outsourcing services. However, the government made clear such proposals are not being considered at this time.

In addition, while not within the scope of the consultation, most respondents set out their belief that the introduction of a VAT zero-rate for fund management of U.K. domiciled funds would increase U.K. fund domicile. They considered that such a change in the VAT treatment of fund management would put U.K. funds on the same footing as non-U.K. domiciled funds, making the U.K. funds environment more competitive and encouraging growth, however the government rejected this proposal.


The whole process has been a little disappointing, with the consultation and delayed response ending up with no real changes being made to the VAT exemption legislation.

To cover off the original aim of improving clarity, the proposed SIF criteria would have ended up providing less certainty, so by keeping to the second aim (the government keeping the list-based approach under items 9 and 10) means fund managers can breathe a sigh of relief.

However, the continued refusal for the U.K. Government to consider a zero-rate for domicile investment funds continues to put funds managed domestically at a disadvantage restricting input VAT recovery for U.K. based investment managers.

How does this affect Fund Management Services now?

Based on the responses, the U.K. Government have decided not to pursue even the limited changes it initially proposed; however, they have implemented a significant change by entering into the new Retained EU Law (Revocation and Reform) Act 2023 (REULA) which came into force on 1 January 2024 and means that U.K. Fund Managers can no longer rely on direct effect of EU laws. The impact of this is that U.K. Fund managers will no longer be able to challenge the scope of the U.K. VAT exemption.

For more information, or assistance on financial and insurance services VAT matters please speak to Darren Ambler, or your usual Menzies contact if applicable.

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