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The UK investment trust industry has welcomed a decision by an Advocate General to the European Court of Justice which, if upheld by the ECJ, could save investment trust shareholders up to GBP40 million in tax.

The joint legal test case launched by the Association of Investment Companies (AIC) and JPMorgan Fleming Claverhouse in January 2004 against HM Customs and Excise, challenged whether investment trusts should pay VAT on management fees.

The case questions why the VAT exemption which is currently available under UK law for the management of Authorised Unit Trusts (AUTs) and Open Ended Investment Companies (OEICs), is not available to the management of investment trusts, even where the objectives of such entities are broadly similar.

In her opinion, Advocate General Kokott stated that the evidence indicated that investment trust companies are comparable to the types of fund (AUTs and OEICs) which are entitled to exemption from VAT and in competition with them.

"Consequently, their management should also be exempted from VAT," she stated. While the opinions of Advocates General are non-binding, the ECJ agrees with their decisions in about eight out of ten cases.

The opinion was welcomed by Daniel Godfrey, Director General, Association of Investment Companies, who commented: “After a near-decade of lobbying, and a legal case that is now in its third year, this has been a real marathon."

"We have always retained great conviction in the strength of our case and are pleased that the Advocate General has fully agreed with our views on all four questions asked of the Court and has rejected all the arguments presented by the Government," he added.

According to Richard Gilroy, indirect tax partner at accounting and business services firm Deloitte, the case could have wide implications both for investment trust companies and UK fund managers.

"It would appear both from this opinion and the Abbey National case last year that the tax authorities in the UK are interpreting the scope of the exemption too narrowly in the UK," he observed.