The Court of Justice of the European Union (CJEU) has ruled that the management of collective investment funds investing in real estate can be exempt from VAT. UK real estate investment trusts (REITs) and similar investment vehicles in the UK should consider making a VAT refund claim.
In the case of Fiscale Eenheid X NV cs (case C-595/13), referred by the Dutch Supreme Court, the CJEU was asked to consider whether the management of three companies, established by a number of pension funds for the purposes of investing in real estate, fell within the exemption from VAT for the management of ‘special investment funds’ under Article 135(1)(g) of Council Directive 2006/112/EC.
Why is this case important for UK REITs?
The management of REITs in the UK is currently subject to VAT at 20%. If the management of REITs were to qualify for VAT exemption, it would clearly benefit REITs which have invested in residential property or non-opted commercial property, ie properties where the rental income is VAT exempt.
These REITs – and other collective investment vehicles invested in similar properties - have little or no entitlement to recover VAT so any VAT on management fees will be an absolute cost.
The CJEU judgment
On 9 December 2015, the CJEU ruled that collective investment companies that invest in real estate are capable of falling within the definition of ‘special investment funds’, provided the national law of their country requires ‘specific state supervision’ of such funds. It is for the national courts of each EU member state to determine whether a fund fulfils this ‘supervision’ condition.
The CJEU also held that VAT exempt ‘management’ of such funds includes investment management costs, such as the selection, purchase and sale of properties and administration and accounting tasks. However, the definition does not extend to the costs of managing the properties themselves, which will remain subject to VAT.
What happens next?
The key question is whether UK REITs meet the supervision test set by the CJEU. REITs are subject to the listing rules of the Financial Conduct Authority (FCA), so it is possible that the supervision of the Stock Exchange by the FCA may be enough to meet this requirement. However, HMRC has yet to make a statement on this case and is likely to take some time to reconsider its policy.
In the meantime, REITs and other property investment trusts should consider approaching their managers to discuss refunds of any VAT incorrectly charged on management fees. In turn, managers should consider lodging claims with HMRC for refunds of this VAT in the past four years. However, it should be noted that managers of REITs would no longer be entitled to recover input tax in respect of their management charges. As a result, managers may seek to increase their fees.
For help and advice on these issues, please get in touch with your usual BDO VAT adviser or contact Stephen Kehoe.