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Hedgeweek Exclusive: Customs & Excise revises VAT position

UK Customs & Excise has revised its position in relation to the VAT treatment of management services provided to non-UK funds.

The move by Customs & Excise has been announced in a Business Brief (10/2003). It follows extensive lobbying on the issue by representative bodies such as AIMA and the IMA, City law firm Simmons & Simmons and other professional advisers.

In the Business Brief, Customs & Excise states that notwithstanding the form of the legislation due to come into force on 1 August 2003, it will treat the management of investment funds established outside the UK, including Dublin funds, Luxembourg SICAVs and the Cayman and other open-ended companies typically used by hedge fund managers, as being outside the scope of VAT.

More importantly, UK managers of such funds will retain the right to recover input VAT on costs incurred by them in providing such management services.

Martin Shah of Simmons & Simmons, the City law firm, who has lobbied Customs & Excise on the subject and discussed the issue with Customs & Excise on 14 July, has contributed the following technical update for Hedgeweek readers:

The Business Brief by HM Customs & Excise will be warmly welcomed by UK hedge fund managers.  In the absence of this Brief, UK managers would effectively have faced a 17.5 per cent increase in their non-salary costs from 1 August 2003.

Non-UK Open-Ended Investment Companies

The Business Brief confirms that notwithstanding the change of law coming into effect on that date, Customs will treat supplies of management services to non-UK open-ended investment companies as outside the scope of UK VAT.

More importantly, UK managers making such supplies will have a right to recover VAT incurred by them in respect of those supplies, on items as disparate as rent, Reuters screens and advisers' fees.

Non-UK open-ended investment companies, typically in the Cayman Islands, form an integral part of many hedge fund structures.

Mr Shah told Hedgeweek: "Had Customs not sought to preserve the status quo for managers of non-UK open-ended companies, the UK would have become a less attractive base of operations for European hedge fund managers.  Customs should be congratulated for listening to the industry and acting swiftly to answer managers' fears."

Whilst Customs' position is in practice a concessionary treatment, it is hoped that the legislation will be changed to reflect this practice.

UK Funds and Management

In relation to UK OEICs, the Business Brief does not show any relaxation in Customs' position that "management" means management of the fund's assets, rather than administration and registration services.

Mr Shah noted: "This an area where the UK law is not entirely consistent with the European directive which it seeks to implement.  Given the growth of business process outsourcing in the financial services sector, our feeling is that further litigation in this area is a real possibility."

Editorial Comment: While the VAT issue appears to be resolved, there are further tax problems looming in the UK for hedge fund managers, this time on the personal taxation front.

The Treasury and the Inland Revenue are reportedly working on plans that could lead to significant tax increases for wealthy UK-based foreigners. These "non-domiciled individuals" are currently not subject to capital gains tax on UK assets providing they hold them in a foreign company or trust.

The change, if implemented, could adversely affect the tax status of many non-UK national hedge fund managers and investors based in London. Several law firms and tax experts are currently lobbying the Revenue, arguing that these changes will drive talent and money away from UK plc.

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