HM Revenue and Customs Brief 11/13
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Issued June 2013
VAT: Modified Treatment for Certain Portfolio Management Fees
Following a European Court Ruling
Purpose of this Brief
This Brief modifies the current VAT treatment of certain
supplies made by portfolio investment managers. This modification is
needed to bring the current treatment into line with the European Court
judgment in the case of Deutsche Bank (C-44/11).
Who needs to read this?
Businesses providing portfolio investment management services
Businesses and other organisations, such as charities, that
receive investment management services
Background to the Judgment
Deutsche Bank provided discretionary portfolio management
services to individual investors. These services consisted of two
(1) the activity of analysing and monitoring the assets owned
by the investors in accordance with a strategy agreed with them, and
(2) the consequential activity of actually purchasing and
selling financial securities on their behalf.
The investors paid a single annual portfolio management fee
which included a separately identified charge for buying and selling
securities. The issue before the Court was whether this charge
constituted consideration for a separate exempt supply.
The Court decided that in the circumstances at issue in the
case the two elements were parts of a single service and, as those
elements were of equal weight and together formed a single supply of
taxable portfolio management services, the entire fee was subject to
VAT at the standard rate.
Revised VAT Treatment
Whilst all portfolio management services are subject to VAT,
the UK currently treats separate charges for effecting the purchase and
sale of securities as exempt from VAT on the basis that they are
consideration for separate supplies. This policy is set out in
Paragraph 1.6 of Notice 701/49 Finance and in
section VATFIN5800 of the VAT Finance guidance manual.
As a result of the judgment, it is clear that fees charged by
portfolio managers on an annual or other periodic basis for the
purchase and sale of securities can no longer be treated as exempt from
VAT, regardless of whether or not a separate charge is made.
However, the ECJ in Deutsche Bank only considered the VAT
position of periodic fees charged on a flat fee basis where there was
no direct link to the transactions being executed. Where, therefore,
fees are charged strictly on a transaction by transaction basis (that
is, per purchase or sale of investments) exemption will continue to
apply. This is conditional upon the portfolio management services being
contracted for on that basis and the transaction charges being
separately identified in any VAT invoice. This VAT treatment will apply
irrespective of whether the portfolio is managed on a full
discretionary or on an advisory basis.
Portfolio management services can be distinguished from other
financial advisory services because there is an ongoing commitment to
monitor and manage an individual client's investment portfolio to
formulate investment decisions or recommendations. They should also be
distinguished from investment fund management services (that is, the
management of pooled investments within a fund structure) where VAT
exemption is dependent upon the nature of the fund being managed.
Please see VATFIN7000 and VATINS5300 for guidance on VAT
treatment of services provided by financial advisors and
VATFIN5100-5400 for guidance on investment fund management services.
Date from which new treatment takes effect
This revised VAT treatment will apply from 1st December 2013.
Where you are in any doubt about the correct VAT treatment
please contact the VAT Helpline on 0300 200 3700.
The HMRC guidance will be updated in due course.
About the Author
© Crown Copyright 2013.
A licence is needed to reproduce this article and has been republished
for educational / informational purposes only. Article reproduced by
permission of HM Revenue & Customs.
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Article Published/Sorted/Amended on Scopulus 2013-06-26 14:10:25 in Tax Articles