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HM Revenue and Customs Brief 11/13


HM Revenue and Customs -Tax Authorities

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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

Financial Advisors

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 elements:

(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

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