Clarity on VAT for discretionary fees needed
Some discretionary managers may see this as an opportunity to move to a single management fee with no separate dealing charges.
On July 19 the European Court of Justice (ECJ) confirmed an earlier opinion of the advocate general that the management of a discretionary portfolio service and the buying and selling of securities within that service consists of two elements that are so closely linked that they form a single economic supply.
As both elements are significant, such securities-based asset management is not exempt from VAT.
Providers typically charge clients for discretionary investment management services in the UK, by levying a management fee based on the value of the client’s portfolio. They also levy transaction charges on purchases or sales within that portfolio.
VAT still an issue
For the management fee, VAT is charged. For the transaction charges – typically being a “bargain administration charge” or ad valorem commission, or both – it is not. This is because the latter has always been deemed as a separate supply of “dealing in shares and securities” which therefore meets the VAT financial services exemption.
Firms providing both discretionary and advisory managed services may consider having consistent charging arrangements for both services
This was a situation that was challenged but ultimately accepted by HM Revenue & Customs (HMRC) in 2009, although HMRC made it clear at the time it would keep the position under review – for example, as a result of a decision in the ECJ or developments in the EU’s review of VAT in financial services. We are now in precisely that position, however, as the European Court of Justice has just ruled on a related dispute between a German tax office and Deutsche Bank, saying the bank must charge VAT on discretionary services.
It is now for HMRC to decide how the principles of the Deutsche Bank case should be applied in the UK – bearing in mind that the case only considered discretionary services. HMRC will have to decide whether the principle of a single supply should apply only to discretionary services, or whether it should also apply to money run on an advisory basis.
The implications for UK investment managers are potentially significant. Firms will also have to consider a number of other issues, including the following:
• Client education – for example, where a discretionary client pays VAT on a purchase or sale of a security undertaken within the discretionary mandate, but decides to purchase a security outside the discretionary mandate as a one-off trade which they execute personally and on which they do not pay VAT.
• If HMRC concludes that the VAT treatment in respect of advisory services remains unchanged, there will be an unlevel playing field between clients who use discretionary management services and those who use management services offered on an advisory basis. The latter does not charge VAT on trades executed within an advisory managed service. This will be a particular issue for firms