On 9 December 2022, the UK government launched a consultation setting out its proposed reforms of the UK VAT treatment of fund management. The full consultation can be found here.

The consultation is the long awaited follow up to Budget 2020 in which a wide-ranging review of the UK’s funds regime, covering both tax and relevant areas of regulation, was promised. The stated overarching objective of the review was to identify options to make the UK an even more attractive location to set up, manage and administer funds, as well as support a wider range of more efficient investments better suited to investors’ needs. As part of this review the UK government promised to introduce a new tax regime for qualifying asset holding companies (QAHCs) in certain fund structures and explore ways to simplify the VAT treatment of fund management fees for UK domiciled funds.

The UK QAHC regime was launched in April 2022 and, until now, publicly there had been no further news on the VAT related aspect of the review.


EU Directive 2006/112/EC includes a VAT exemption for supplies of fund management services provided to “special investment funds” (“SIFs”), the effect of which is that management fees paid by SIFs are exempt from VAT. As is typical for EU Directives, the detail of how each Member State implemented the Directive into its own domestic law was left to each Member State to determine.

Unlike other jurisdictions, for example Ireland, Italy, Luxembourg and the Netherlands, the UK defined SIFs narrowly. In addition, the current UK VAT regime in relation to fund management is governed by a combination of UK legislation, retained EU law and case law and, given these multiple sources, it has historically been difficult to apply the SIF exemption with a sufficient degree of certainty In the UK.

Very broadly, the UK SIF exemption currently applies to authorised unit trust schemes (AUTs), open-ended investment companies (OEICs) and funds and similar collective investment undertakings which compete in the UK retail market (i.e. for investment by the general public) under comparable conditions to funds falling under the UCITS Directive (this sets out common EU rules for the regulation of ‘Undertakings for Collective Investment in Transferable Securities’).

For private equity managers raising funds structured as English limited partnerships this means that the VAT exemption is unavailable. Consequently, the fund’s general partner needs to be VAT grouped with the UK manager/adviser to mitigate UK VAT leakage. By contrast, a fund structured as, for example, a Luxembourg société en commandite spéciale or “SCSp” benefits from a VAT exemption in Luxembourg in respect of management and certain related services provided to it.

The consultation: proposed changes to UK VAT rules for fund management

The UK government has stated that the aim of the consultation – which forms part of its wider agenda to remove reliance on retained EU law – is to consolidate both the existing UK exemptions and retained EU law in the UK statute to “provide a clearer, more certain legislative basis for decisions by fund managers and HMRC.” The government has simultaneously noted that its approach is “not intended to result in a significant policy change in VAT treatment for the fund management industry”, but is meant to clarify the existing regime with which the industry is already familiar. It is therefore meant to be a clarification exercise as opposed to a means of introducing fundamental change.

Other possibilities such as extending the range of funds qualifying for exemption, broadening the meaning of “management” and/or introducing a reduced or zero VAT rate for UK private equity funds do not appear to be under consideration currently.

As regards the specific proposals, the government has explained that:

  1. It will retain the list of exempt fund types currently set out in the UK VAT rules, for the sake of continuity of treatment of existing funds. The government does not intend to expand this list in future.
  2. Legislative changes will be made to incorporate relevant case law and guidance into UK law, resulting in the establishment of defined criteria for eligibility for the SIF exemption from VAT. These criteria would require that:

(a) the fund is a collective investment;

(b) the fund operates on the principle of risk-spreading;

(c) the return on the fund’s investments depends on their performance, and holders must bear the risk connected with the fund; and

(d) the fund is subject to the same conditions of competition, and appeals to the same circle of investors, as UCITS (i.e. funds intended for retail investors).

The consultation states that, given the substance of (d), the government is proposing not to include a further requirement under the existing EC Guidelines criteria which specifies that funds qualifying as SIFs must be subject to “State Supervision”, i.e. regulation of the fund.

This latter statement suggests that in principle it may be possible for a fund that is not authorised by the UK Financial Conduct Authority to access the VAT exemption for management services although it is difficult to see this having application in practice since funds that meet condition (d) above would typically need to be regulated. And, as noted above, the proposed reforms are not intended to result in policy change but are intended to improve the legislative basis of the VAT treatment of fund management. Further detail on condition (d) will be key.

To ensure the correct interpretation of criteria (a) to (d) above, the government is also proposing to include a clear definition of “Collective Investment” in the VAT legislation, which it says would broadly mirror that provided within the Financial Services and Markets Act 2000.

Next steps

The government is now requesting feedback from affected individuals and organisations including, in particular, UK fund managers as to whether its proposed approach would serve the intended purpose of refining and clarifying the UK law covering the VAT treatment of fund management, and whether such reforms would have any adverse effects. The consultation runs until 3 February 2023, following which the government will publish a formal response, including next steps.


Given the uncertainty on the scope of the UK’s SIF exemption currently, the introduction of clear legislation to codify the scope of the exemption is a welcome development.

However, it is somewhat disappointing that the UK government has not taken this opportunity to review the scope of the exemption more broadly, in particular to bring it into line with the broader exemptions offered by other EU jurisdictions. Whilst broadening the scope of the exemption in the UK may not have a meaningful impact on private investment funds established in the UK from a “cash tax” perspective taking all other factors into consideration, it would simplify the VAT structuring that such funds need to put in place to mitigate unnecessary VAT leakage.