if the manufacturer can work with a tolerance of +/-0.1mm, why
do I need to keep a clearance of 0.5 mm along the edges.

Just because a manufacturer can print the copper within 0.1mm of an edge doesn't mean it will function properly there, or even survive.  There have been a few reasons already listed, but I'll go down the list a bit:

Your copper is printed using that 0.1mm copper location tolerance, Is that for a 2 layer board, or multilayer?  If it's multilayer, add the layer registration tolerance.  So we've got copper printed pretty close to where we want it, but now we must add the tolerance of the router, both tool size and routing location.  That's router, or v-groove.  If it's v groove, you must also add in the distance required for the angle of the v groove.  These cutting actions are both rather stressful to the laminate.  If you have left enough room that the copper isn't exposed and smeared, you could still now have openings created in the laminate, between the foil and edge.  If that didn't happen at the fabricator, it could happen when assemble d boards are depanelized.  The boards might still function, but what could that exposed copper short to?  If the routing or scoring didn't separate laminate due to it's proximity to the foil, you still have to abuse that weakened board to a lot of heating and cooling.

I probably left out a couple other risk factors, but you get the picture, 0.1mm doesn't apply here.  The IPC  has done their homework, you can trust the standard.  You might gain a little space from things like laser routing,  but the physics of PCB fabrication hasn't changed much since that was published.  Joyce suggested discussing this with you fabricator - always a good idea, they ARE the experts.  But keep in mind that your supply chain might switch vendors.

There's also another concern - why are your designers asking this?  The difference between copper tolerance and mechanical tolerance should be basic understanding.  OK, that's a bit of my standard "PCB design is more than connecting dots" rant, but still a valid concern.  

Pete