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Home > Investments > Discretionary Management

By Jenna Voigt | Published May 08, 2012

European court: DFMs not exempt from VAT

In an opinion statement published today, the ECJ has recommended all elements of discretionary management services, including initial charges, should be subject to VAT, backing HM Revenue & Customs’ recent clarification in VAT guidance.

Under the VAT Act 1994, discretionary services are subject to VAT but dealing fees and commission involved in discretionary services are exempt.

As Investment Adviser reported last month (April 20), many discretionary fund managers were able not to charge VAT on their initial fees by disaggregating their management services and fees into separate parts – research, advice, intermediation, investment management and administration.

But on February 29, HMRC issued guidance, which is due to come into force in 2013 alongside the FSA’s RDR overhaul of financial advice, preventing discretionary fund managers (DFM) from not paying VAT in this manner, a move supported by the ECJ’s opinion statement.

In the statement, ECJ advocate general Eleanor Sharpston said discretionary services should not be disaggregated, rather such services should be viewed as offering a single service, and is therefore liable to VAT.

Ms Sharpston said: “It is settled case-law that, where a transaction comprises a bundle of elements, regard must be had to all the circumstances in order to determine whether there are two or more distinct supplies or one single supply.

“Although each transaction must normally be regarded as distinct and independent, a transaction which comprises a single supply from an economic point of view should not be artificially split, so as not to distort the functioning of the VAT system.

“Moreover, in certain circumstances, several formally distinct services which could be supplied separately must be considered to be a single transaction when they are not independent.”

The advocate general concluded: “In the light of all the above considerations, I am of the opinion that the court should answer the Bundesfinanzhof’s (Federal Finance Court’s) questions to the following effect: that portfolio management services of the kind at issue in the main proceedings form a single supply for VAT purposes.

“Such services do not fall within the exemption provided for on the common system of value added tax.”

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