Government urged to act on costly CIF tax 'anomaly'

Loophole could be costing charities millions of pounds a year, say experts

Charities are losing out on tens of millions of pounds a year by having to pay VAT on investment management fees that should be exempt from tax, according to the Charity Investors' Group.

Charities currently have to pay VAT on management fees for Common Investment Funds, which enable not-for-profit organisations to buy units in a portfolio of investments without paying stamp duty and capital gains tax. The total value of CIFs is estimated at several billion pounds.

Charity representatives have said there should be no VAT on management fees for CIFs, because they are a specialised type of unit trust that should be exempt under European law covering similar financial arrangements.

The Charity Investors' Group, a membership organisation for investment houses and major charitable investors, is among those trying to persuade the Government that CIF management fees should not be subject to VAT.

Charles Mesquita, a director of the group, said the arrangement was costing the charity sector tens of millions of pounds.

"We're trying to say that this is an anomaly, and we want to see fair treatment for charities," he said. "We believe the law wasn't written with charities in mind."

John Kelly, head of client investment at investment house CCLA, one of the largest providers of CIFs, said there was virtually no difference between a CIF and a standard unit trust.

"On precedent, the VAT exemption should extend to CIFs," he said. "But the Government is resisting because it has no money to give away."

The Charity Tax Group, which campaigns on tax issues affecting charities, said it had been discussing the matter with HM Revenue & Customs.

Peter Jenkins, a CTG technical adviser, said the EU exemption was so vaguely worded it was difficult to tell which funds should qualify.

"There is a campaign afoot to widen the definition," he said. "The pension fund trade association is seeking to win an exemption for its members."

A spokesman for HMRC said the management of CIFs that were not authorised by the Financial Services Authority did not qualify for a VAT exemption.

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