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HMRC will be liable to make repayments of millions of pounds following its acceptance that fund management of venture capital trusts (VCTs) should have been exempt from VAT since January 1990, say VAT experts at accountants PKF. 

Historically, HMRC maintained that fund management of closed ended investment vehicles, such as investment trust companies (ICTs) and VCTs, should be subject to VAT. Last year the European Court of Justice (ECJ) ruled that fund management should be exempt in a case involving investment trust companies (JP Morgan). Their judgment suggested that other collective investment schemes should also benefit from exempt fund management.

HMRC announced in the 2007 Budget that they would change UK law to exempt fund management for ICTS and VCTs going forward with effect from 1 October this year. They have now announced that they accept that fund management for VCTs should have been exempt since 1 January 1990.
 
HMRC will limit its liability by applying the three year cap on claims – which means that claims will only be met if lodged within 3 years of the overpayment. However, because of the House of Lords’ decision in Conde Nast earlier this year, HMRC also accept that they will have to meet claims for overpayments made between 1 January 1990 and 4 December 1996, as long as they are lodged before April next year.
 
PKF VAT Director Debbie Jennings says: "This is a great result for VCTs and shows that HMRC are applying VAT exemptions too narrowly in certain areas.
 
“Any fund manager which has charged VAT to VCTs on fund management can now reclaim that VAT.  Claims against HMRC can normally only be made by fund managers – but VCTs should be able to then claim a refund from their fund manager. The good news for investors is that this should increase the value of the funds in which they are invested.
 
“The capitulation may also indicate that ultimately HMRC might give in over the fund management of pension funds and the sums of money involved there are even greater. The National Association of Pension Funds (NAPF) is taking a case with the pension fund for Ford, Jaguar and Land Rover to the UK VAT Tribunal claiming that pension fund management should be exempt from VAT following the JP Morgan case. “

In summary, this annoucement is good news for investors as the decision will mean an increase in the value of funds.