As part of the Edinburgh Reforms announced last December, the government launched a consultation on reforming the fund management exemption. Currently, funds are within the exemption if they are either on a UK domestic statutory list of exempt funds or can rely on "direct effect" of EU law (by falling within the EU law concept of "special investment fund"). In the consultation, the government proposed introducing a characteristics based test based on (its view) of the EU law position, with the domestic statutory list being retained but not updated. For more detail on the proposals please see our briefing.
The government has now published a document summarising the responses to the consultation which also sets out the next steps. In light of the responses it received, it has decided not to go ahead with the proposals. Instead, the domestic statutory list will be retained.
An important issue that the recent announcement does not specifically address is the position from 1 January 2024 for funds that are not on the domestic list but instead rely on the direct effect of EU law. The Retained EU Law (Revocation and Reform) Act 2023 (REUL) repeals various aspects of "retained EU law" from that date, including the principle of direct effect. The government recognises that this could have a disruptive effect on VAT, and so is introducing legislation limiting the extent of the REUL sunsetting provisions in relation to it. However, the exact scope of this limiting legislation is unclear. We will be seeking further clarity on the point, and will keep you updated.
In addition, despite calls for it to do so, the government has said that it will not legislate to define the (crucial) term "management" (as it considers that settled case-law provides sufficient certainty) or widen its scope. However, it will take forward requests for further definition in this area as part of a review of current guidance.
