Luxembourg, 03/07/2007 (Agence Europe) - In its judgment on case C-363/05 delivered on 28 June, the Court of Justice followed the conclusions of the advocate general (see EUROPE 9380). According to the Court, JP Morgan Fleming Claverhouse Investment Trust plc can reclaim from British tax authorities the VAT it has paid since 1990 for management services, since these were services for a closed-end fund, and, thus, exempt from VAT under the terms of the sixth VAT directive (77/388/EC). The situation arises because of a specific point of British tax law, so no repercussions at European level are expected.
JP Morgan Fleming Claverhouse Investment Trust plc is an Investment Trust Company (ITC), that is, a closed-ended fund. ITCs are risk-spreading pooled investment vehicles which are listed as public limited companies on the Stock Exchange, and invest in a portfolio of investments. Investors hold shares in the company, not in the company's portfolio. The number of shares (subject to possible increases in share capital) remains unchanged, and the shares cannot be repurchased by the company (as is the case with other types of fund), only resold on the stock exchange. For these reasons, the value of these funds is more volatile than others, since several factors play a role every bit as important as the value of the portfolio that the fund holds.
JP Morgan Fleming Claverhouse Investment Trust plc receives management services in relation to its investments from JP Morgan Fleming Asset Management (UK) Limited, in respect of which it currently pays VAT. It appealed to the VAT and Duties Tribunal against the charge of VAT, and, in 2005, this Tribunal asked the Court of Justice if the exoneration under the terms of the sixth directive could include ITCs such as JP Morgan Fleming Claverhouse Investment Trust plc.
In Article 13, B, the directive allows member states to exempt from VAT the management of investment funds, as defined by the member states, subject to conditions they themselves set to ensure correct and simple application of exemptions, and to prevent any possible fraud, avoidance or abuse. The Court highlighted, too, that this provision, while it may be applied at the discretion of the member state, must not lead to conditions of unfair competition. It is a matter, then, of determining if closed-ended funds are sufficiently similar to, for example, open-ended funds to compete with them. Were this to be so, British legislation would not be compatible with Community law, since it makes one competitor subject to VAT and not the other. It will be up to the British court to decide on this, but the Court is clear that, according to the information received, such discrimination “does not appear justified”.
If the British court comes to the same conclusion, JP Morgan Fleming Claverhouse Investment Trust plc will be able to reclaim the incorrectly paid VAT. Sir Michael Bunbury, chairman of the company, welcomed the judgment. “JP Morgan Fleming Claverhouse suffered £460,000 in irrecoverable VAT last year. In future, this money, together with refunds relating to earlier years, should be available to shareholders,” he told press. The decision applies to other companies in the same circumstances. The Association of Investment Companies, co-plaintiff in the case at the Court, estimates that nearly 200 funds could benefit from back payments of VAT, worth £300 million and future exemptions amounting to £40 million per year. This is not surprising, according to its director general Danial Godfrey, who points out that “in other member states where they have them, closed-ended funds already benefit from exemption. It's really Britain that's out of line. In fact, I'm not even sure that there's enough in this judgment to extend it to areas like pensions schemes. We might need some more cases to clear this up”. (cd)