European Court rejects VAT exemption on a single package of services used for managing both specified and non-specified investment funds.
On 2 July 2020, the Court of Justice of the EU (“ECJ”) issued a judgment stating that a single package of services bought in by an asset manager which is used partly for managing specified investment funds (SIFs) and partly for managing non-specified investment funds (non-SIFs) does not qualify for VAT exemption. The judgment is potentially relevant to fund administration providers, life assurance companies, asset and investment managers/advisers, and other businesses supplying or receiving a single bundle of services which is used for both VAT exempt and VAT taxable activities. While the Irish Revenue Commissioners have not yet commented on the judgment, such businesses should carefully review the VAT treatment currently adopted to any similar types of services they supply or receive. The judgment does not however impact on the VAT exemption that applies to services directly involving the management of a SIF where that activity is specific to and essential for the management of the SIF.
The case involved services bought in by BlackRock Investment Management Limited in the UK (“BlackRock UK”) from its US affiliate (“BlackRock US”). While VAT exemption applies to the management of SIFs (which are of a kind specified in the relevant country’s VAT law) , the question in this case was whether the bought-in services, which were used by BlackRock UK in the course of managing both qualifying and non-qualifying funds, could be split and treated as VAT exempt to the extent they were used to manage SIFs.
By way of further background, the bought-in services were provided by BlackRock US through a software platform called Aladdin. The Aladdin platform provides portfolio managers with market analysis and monitoring to assist in the making of investment decisions, monitors regulatory compliance and enables portfolio managers to implement trading decisions. The majority of the funds managed by BlackRock UK to which the Aladdin services related were non-SIFs, but a portion were SIFs. BlackRock UK took the view that that the portion of the services relating to the latter should be VAT exempt based on the relative value of the qualifying funds under management. HMRC disagreed and the case has since gone through the UK Courts before being referred to the ECJ.
The ECJ concluded that, based on the facts presented by the national court, the bought-in services constituted a single supply that would be artificial to split and should therefore be subject to VAT on the entire package. This follows already decided case-law which confirms that a single supply of services should follow a single overall VAT treatment. However, the fact that, in BlackRock’s case, the majority of funds under management were non-qualifying funds was not the defining reason for the ECJ’s conclusion. Rather, the ECJ held that because the services were used for both qualifying and non-qualifying funds, they could not be said to be specific to the management of qualifying funds which would be necessary for VAT exemption to apply. The ECJ therefore indicated that even if the majority of funds had been qualifying funds, the ECJ would still have concluded that the services were VATable.
While the ECJ’s conclusion is not entirely surprising given that the services in question were considered to be a single supply, the ECJ’s basis for arriving at that conclusion merits further consideration and could have wider implications where a single package of services is used for both VATable and exempt activities. Interestingly, the Advocate General’s Opinion in this case (while reaching the same overall conclusion as the Court) had left open the possibility of splitting the service if there was detailed data which precisely and objectively identifies the services provided to SIFs versus non-SIFs. This point was not repeated in the ECJ’s judgment but could be considered further in seeking to establish whether services constitute a single supply for VAT purposes.