Business Brief 07/06

27 Jun 2006 11:15 AM

Contents:
1. VAT: New reduced rates for supplies of contraceptive products and welfare advice and information

2. VAT - End of litigation in IDT Card Services Ireland Limited (IDT)

3. VAT - Exemption for the Management of Authorised Collective Investment Schemes

1. VAT: NEW REDUCED RATES FOR SUPPLIES OF CONTRACEPTIVE PRODUCTS AND WELFARE ADVICE AND INFORMATION

At Budget 2006, in support of its sexual health strategy, the Government announced that, subject to Parliamentary approval, a reduced VAT rate of 5% for supplies of all contraceptive products would be introduced from 1 July 2006. The Statutory Instrument to introduce the reduced rate has now been laid before Parliament and is due to come into effect on that date. In addition, the Statutory Instrument will also introduce a reduced rate for supplies of welfare advice and information as announced as part of Budget 2006.

Contraceptive products
Businesses making supplies of contraceptive products should therefore ensure they are prepared for this VAT reduction on supplies made from 1 July 2006.

Contraceptives obtained on the prescription of a medical practitioner are VAT zero-rated, whilst contraceptives that are fitted, injected or implanted by a health professional form part of a VAT exempt supply of medical care. The new reduced rate will not affect the liability of those supplies.

For more detailed guidance on the application of the reduced rate, please see Budget Note 40, which is available on our website (www.hmrc.gov.uk).
Welfare advice and information
The reduced rate applies to supplies of welfare advice and information made by charities and other state regulated welfare providers. All other such supplies remain subject to VAT at the standard rate of 17.5%.

For guidance on the application of the reduced rate for welfare advice or information charities should contact HM Revenue & Customs' Charities Helpline on 0845 3020203. State regulated commercial welfare providers should contact HM Revenue & Customs' National Advice Service on 0845 010 9000.

2. VAT - END OF LITIGATION IN IDT CARD SERVICES IRELAND LTD (IDT)

The House of Lords has refused IDT leave to appeal against the decision of the Court of Appeal (see Business Brief 03/06). This Business Brief article explains HM Revenue & Customs' (HMRC) position now that the litigation has been concluded in our favour.

HMRC's position in this case was previously set out in Business Brief 29/03: when phone cards are supplied to a UK distributor by an issuer in another Member State, operating a scheme such as IDT's, UK VAT is due from the UK distributors on their onward sale. HMRC do not accept that there are any circumstances in which telecommunications services consumed within the EU can be VAT free, which would have been the effect of IDT's scheme, and the Court of Appeal has agreed with HMRC.

Business Brief 03/05, Business Brief 20/05 and Business Brief 03/06 explained HMRC's position pending the outcome of the litigation. Now the litigation has been concluded in HMRC's favour, we will enforce existing assessments and raise new assessments to collect underdeclared VAT from the distributors of both IDT's phone cards and other phone cards sold under similar arrangements.

Businesses are required to make a voluntary disclosure of underdeclared VAT and pay any VAT that is due together with any related interest, to restrict the amount of interest charged. Guidance on making a voluntary disclosure can be found in Public Notice 700/45 How to correct VAT errors and make adjustments or claims.

3. VAT - EXEMPTION FOR THE MANAGEMENT OF AUTHORISED COLLECTIVE INVESTMENT SCHEMES

This Business Brief article announces changes to HMRC's policy concerning the VAT exemption for the management of authorised collective investment schemes, following the judgment of the European Court of Justice (ECJ) in case C-169/04, Abbey National Plc & Inscape Investment Fund ("Abbey"), on 4 May 2006.

It updates the section of Business Brief 10/03 headed 'What constitutes "management"?' and the changes apply from 1 October 2006.

Background
Article 13B(d)(6) of the Sixth VAT Directive exempts "Management of special investment funds as defined by Member States". The United Kingdom applies this exemption to the management of authorised unit trusts (AUTs), and of the scheme property of open-ended investment companies (OEICs). The exemption is effected in UK law by items 9 and 10 of Group 5, Schedule 9 to the VAT Act 1994.

HMRC's policy has been to apply the exemption to fund management in a strict sense, i.e. where it involves the assessment of financial risks, the making of investment decisions as to both the selection and disposal of assets under management and a direct involvement in the transactions concerning the assets of the fund, mainly in securities. Services not comprising such investment management functions, such as fund accounting and administration services, were regarded as taxable.

Abbey challenged this interpretation and appealed to the VAT & Duties Tribunal against VAT charged to it on fund accounting and administration services and also against VAT charged to its funds on depository and trustee services. The case was referred to the ECJ, which delivered its judgment on 4 May 2006.

The Abbey judgment
Firstly, the court has ruled that "management" in Article 13B(d)(6) has its own independent meaning in Community law and Member States' discretion to define "management of special investment funds" relates only to the meaning of special investment funds and not to the activities which constitute "management" of such funds.

In considering the services at issue in the appeal, the court made reference to the UCITS Directive, as amended (European Council Directive 85/611/EEC, setting out common EU regulatory requirements for undertakings for collective investment in transferable securities - "UCITS").

It found that the services of trustees or depositories, such as those set out in Articles 7(1) and (3) and 14(1) and (3) of the UCITS Directive, are not covered by the concept of management and are therefore excluded from exemption. This affirms HMRC's policy in respect of such services and they continue to be subject to VAT.

For fund accounting and administration services, the court found that they would qualify as management of special investment funds for the purposes of the VAT exemption if, "viewed broadly, they form a distinct whole and are specific to, and essential for, the management of those funds".

Revised interpretation of the law

Again by reference to the UCITS Directive, the court viewed that tasks, such as those set out in Annex II to the Directive under the heading 'Administration', and which are functions specific to special investment funds, are capable of coming within the scope of the exemption. Under this heading are:

a) legal and fund management accounting services;
b) customer inquiries;
c) valuation and pricing (including tax returns);
d) regulatory compliance monitoring;
e) maintenance of unit-holder register;
f) distribution of income;
g) unit issues and redemptions;
h) contract settlements (including certificate dispatch); i) record keeping.

The court also found that the exemption does not in principle preclude the management of special investment funds being broken down into a number of separate services which may come within the meaning of "management" for the purpose of the exemption.

HMRC accept that, to benefit from the exemption, it is not necessary that a third party provider of fund administration services performs all of the administration functions required by regulations such as those listed in Annex II to the UCITS Directive (and applicable to UK funds under Financial Services Authority sourcebook rules). It is, however, necessary that the services must, viewed broadly, form a distinct whole fulfilling in effect the specific essential functions of management. In other words, the service must be recognisable in its own right as a service of fund administration.

Just because a particular operation (such as each of those listed in Annex II) is a requirement of regulations it does not necessarily mean that it is exempt if provided in isolation. For example, legal services such as advice or drafting may be required to ensure that certain documents, e.g. a trust deed or fund prospectus, are valid and comply with the regulations, but this does not mean that the legal service is one of exempt fund administration. Similarly, an external audit of accounts does not of itself assume the characteristics of a fund administration service.

To be exempt, it is necessary for the service to be distinct as a fund administration service. This "distinctiveness" is normally attained by the bundling, into a single supply, of numerous operations that are typical of the administrative management of e.g. an OEIC. In deciding whether the overall service is distinct as fund administration, both the number of specific operations and their individual characteristics need to be taken into account.

For example, the daily valuation of assets is of particular importance and relevance to OEICs and AUTs in determining the price of shares or units and so this, together with related accounting and reporting functions would be sufficiently distinctive as a fund administration service. However, a service such as "price feeding" of information consisting of the market value of individual stocks, provided to the person carrying out the fund asset valuation, is not in itself a fund administration service.

As a further example, the maintenance of a register of shareholders does not, in isolation, represent a fund administration service. However, if the service is combined with the issue and redemption of the units or shares and collating the number of shares in issue for the purpose of establishing the daily price of the units, such a package takes on the distinct characteristics of fund administration and will be exempt.

HMRC are satisfied that the bundle of services provided by the Bank of New York in the Abbey case is exempt. This consisted of computing the amount of income and the price of units or shares, the valuation of assets, accounting, the preparation of statements for the distribution of income, the provision of information and documentation for periodic accounts, income forecasts and tax returns, as well as data processing, record-keeping and customer inquiries.

There are a number of businesses which provide specialist fund administration services in respect of AUTs and OEICs. In many cases, these services comprise a package of functions which, together, will satisfy the criteria for the exemption. However, as with some of the examples above, certain services or bundles of services cannot be viewed as a distinct service of fund administration. For instance, the legal services referred to above might be described as "specific to, and essential for", the management of the fund but they are not fund administration services.

If the criteria for exemption are satisfied, it should also be noted that a person providing such a package of services will generally be viewed as making a single exempt supply of fund administration services in respect of each fund where the manager has delegated the administrative functions. The fact that each element may be priced separately on a rate card does not affect this.

In summary, HMRC accept that, in accordance with the judgment, services which, viewed broadly, are distinct as fund administration services, and are specific to and essential for the management of AUTs or OEICs are exempt.
Making claims or adjustments
Businesses that that have taxed fund administration services which satisfy the criteria above should exempt such services made from 1 October 2006. There is no requirement to make adjustments in respect of supplies made prior to this date. However, where businesses wish to make a claim to HMRC for a repayment of output tax incorrectly paid, they may do so, subject to the conditions set out below, by using one of the following methods (full details are given in VAT Notice 700/45 How to correct VAT errors and make adjustments or claims):

* Where the total of previous errors does not exceed £2000 net tax, an adjustment may be made to your current VAT return.
* Where the total of previous errors exceeds £2000 net tax, a separate claim should be submitted to HMRC (in these cases the errors must not be corrected through your VAT returns). Details of where to send your claim can be obtained from update 2 to VAT Notice 700/45 How to correct VAT errors and make adjustments or claims or the HM Revenue & Customs National Advice Service on 0845 010 9000.

All adjustments or claims are limited to a three-year period and will be subject to the following conditions:

* All claims must take into account input tax that has been claimed, but which under the revised interpretation will not relate to taxable supplies.
* Businesses must be able to produce evidence that they accounted for VAT in the circumstances described above, and must be able to substantiate the amount claimed.

Subject to the three-year limitation period, any claim should be for all prescribed accounting periods in which the liability error occurred.

Should a claim not take into account all errors or all affected accounting periods, then HMRC will seek to set-off amounts owed to us for these periods against amounts claimed in other periods.

HMRC may reject all or part of a claim if repayment would unjustly enrich the claimant. More details on 'unjust enrichment' can be found at part 14 of VAT Notice 700/45 How to correct VAT errors and make adjustments or claims.

A notification to HMRC that a business intends making a claim in the future is not a valid claim.
Businesses that have lodged "protective" claims pending the judgments should review them to ensure that they comply with the criteria of the judgment explained in this Business Brief and satisfy the above conditions. In particular, any claims in respect of the services of trustees or depositories should be excluded, as the ECJ confirmed HMRC's view that the supply of these services is taxable at the standard rate.

Further information
For further information and advice, please contact HM Revenue & Customs' National Advice Service on 0845 010 9000.

The views expressed in this Business Brief are those of HM Revenue & Customs.

GENERAL ENQUIRIES:

For general enquiries please contact HM Revenue & Customs' National Advice Service on 0845 010 9000.

This release and other information about HM Revenue & Customs can be found at our website: www.hmrc.gov.uk

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