JPMorgan Fund Joins Tax Lawsuits Seen Costing U.K. $1.6 Billion

U.K. tax officials may have to pay out 1 billion pounds ($1.62 billion) to about 100 investment funds -- including some run by JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc -- suing for the return of overpaid taxes dating back two decades.

Her Majesty’s Revenue & Customs won’t disclose what it may owe the funds in lawsuits stemming from a 2007 European Court ruling that investment trusts were improperly charged value-added tax on management fees. Marc Welby, a partner at accounting firm BDO LLP estimated the agency might have to refund about 1 billion pounds.

The litigation “is about investment trusts who feel short-changed over the way in which HMRC handled claims,” said Welby, a London tax specialist who isn’t involved in the dispute.

U.K. lawmakers have publicly censured companies including Starbucks Corp. and Apple Inc. for using legal loopholes to minimize taxes. At the same time, the agency in charge of collecting them is fighting in the courts to avoid refunds that could cost the government billions of pounds.

About 120 investment trusts, including others operated by BlackRock Inc., Schroders Plc and Investec Plc, have sued HMRC since May 2012, according to court filings that didn’t show the reason for the suits. Two people familiar with the actions said at least 100 of them are related to overpaid VAT.

HMRC has denied two Freedom of Information requests by Bloomberg News seeking a figure for how much the U.K. may have to repay if the suits are successful.

VAT is a tax charged on goods and services provided in the U.K. A European Union Court of Justice ruling in 2007 found that services provided by fund managers to investment trusts were exempt, meaning VAT shouldn’t have been charged. The VAT was charged to trusts by managers, who then paid tax to HMRC.

Bottom Line

“The bottom line here is that it’s about investment trusts that were unlawfully charged tax,” said Ian Sayers, director general of Association of Investment Companies. “It’s not unreasonable for people unlawfully charged tax to seek to recover it.”

It’s difficult to determine the U.K.’s liability in the lawsuits because they deal with different time periods and several types of funds, including closed-end investment trusts, venture capital trusts and pension funds.

The suits are complicated by the way VAT is collected. Investment managers charged VAT to the funds in their fees, and that money was eventually collected by the government. The funds are challenging several factors including whether they can sue HMRC directly, and which time periods going back to the 1990s are eligible for refunds. Any pay outs would ultimately benefit investors in the funds, Welby said.

Manager Collection

HMRC argues it can’t be sued by the funds because the managers collected the tax. It said some of the money claimed has already been repaid to the investment managers who received the VAT.

The funds have “no right, in principle, to make a claim against HMRC,” the tax agency said in a statement.

UK Uncut, a public interest group that opposes budget cuts, called on the HMRC to release the information, saying many of the institutions behind the lawsuits contributed to the 2008 financial crisis.

“The fact that this is happening is both incredible and sad,” Bruce Scott, a spokesman for UK Uncut, said in an e-mail. “Trying to extract further funds from a government is effectively taking funds from members of the public. This is a kick in the teeth to every person that has suffered as a result of the crisis these companies caused.”

‘No Right’

The Information Commissioner’s Office, an independent body overseeing transparency by public agencies, found HMRC had breached Freedom of Information rules in its first response to Bloomberg News. HMRC didn’t confirm it had an estimate of the figure sought within proper time limits.

The commissioner said HMRC had spent “a significant amount of time” on the request, and noted that it had agreed to process a new request for a “ballpark figure” of its liability. That request was also rejected by HMRC last month and Bloomberg News has again appealed to the ICO.

It’s not in the public interest to reveal how much it may owe in the investment fund suits, HMRC said in a Sept. 13 response to the second Bloomberg News Freedom of Information request. While it has an estimate, HMRC said publicizing the figure might encourage other claims and compromise its defense.

Increase Speculation

“I don’t understand why HMRC always tries to keep these sorts of numbers private as it seems only to serve to increase speculation as to the size and why they are being so secretive,” BDO’s Welby said.

His liability estimate is based on a 2012 U.K. court case involving seven trusts seeking an average of 430,000 pounds. Assuming there are 150 claims, adding simple interest would take the total to about 1 billion pounds.

Spokesmen for JPMorgan, BlackRock, RBS and Schroders declined to comment. Investec official Vian Sharif didn’t respond to e-mails and a phone call seeking comment.

Sayers of the Association of Investment Companies said members of the group had already been refunded about 200 million pounds based on the 2007 European Court ruling.

The legal division of PricewaterhouseCoopers LLP is advising on as many as 50 lawsuits, according to one of the people familiar with the cases. PwC head of tax litigation Mark Whitehouse declined to comment when reached by phone.

Some U.K. court rulings on VAT have been appealed so the issue is unlikely to be resolved until at least next year, according to Welby. HMRC won a strand of the litigation in March when the European Court ruled its interpretation of VAT exemptions for pension funds was correct.

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