UK Government gives up in £300m VAT battle with AIC

The Association of Investment Companies (AIC) and JPMorgan Claverhouse Investment Trust plc have formally won their lengthy legal test case against HM Revenue & Customs (HMRC) that investment trusts should be exempt from VAT on management expenses.

This follows HMRC’s withdrawal from the AIC’s appeal to the UK VAT Tribunal. HMRC have now accepted the European Court of Justice’s judgement of 28 June 2007 that investment trusts should be exempt from VAT on management expenses.

The news paves the way for the investment trust industry to press ahead with the recovery of VAT paid in the past, which could amount to up to £300m, as well as an annual saving to the sector going forward of around £40m per year. The AIC will be urging HMRC to pay out these back claims without delay.

The AIC expects the Government to consult on the changes to UK VAT law that will be required in light of this victory. The AIC will be calling on the Government to use this opportunity to extend the VAT exemption to Venture Capital Trusts as well.

Sir Michael Bunbury, Chairman of JPMorgan Claverhouse Investment Trust plc, said: “We are delighted that we have now officially won. JP Morgan Claverhouse suffered £460,000 in irrecoverable VAT last year. In future, this money, together with refunds relating to earlier years, should be available for shareholders. The benefit will compound into the future and further enhance shareholder value.”

Daniel Godfrey, Director General, Association of Investment Companies (AIC) said: “This victory concludes some 10 years of work by the AIC. Now that the Government has accepted that it was unlawful for it to levy VAT on the management fees of investment trusts, it should move quickly on the issue of back claims so that shareholders can benefit as soon as possible.

“We also call on the Government to use this opportunity to extend the VAT exemption to Venture Capital Trusts. The ECJ commented that the purpose of the VAT exemption was to enable private investors to benefit from collective fund management services without the imposition of VAT. As this applies as much to VCTs as investment trusts, the Government should include VCTs in any legislation to exempt investment trusts from VAT.”