UK: IT services provided single fund management service not exempt from VAT (CJEU judgment)
UK: IT services provided special investment funds
The Court of Justice of the European Union (CJEU) issued a judgment concluding that a supply of services provided through an IT platform for the benefit of “special investment funds” and other funds was not exempt from value added tax (VAT) under article 135, 1, g) of the VAT Directive. Therefore, the CJEU concluded the entire supply was subject to VAT.
The case is: Blackrock Investment Management (UK) Ltd (C-231/19, 2 July 2020).
In this case, the CJEU addressed whether a purchased single service can, for VAT purposes, be split in such a manner that part of the payment for that service is VAT-exempt under the exemption for the management of special investment funds, while the other part is treated as VAT-taxed. The taxpayer argued that it is possible to make such a split because the purchased service was used for, on the one hand, the management of special investment funds (VAT-exempt) and, on the other, for funds that are not special investment funds (VAT-taxed).
The CJEU did not agree with this position and concluded that a single fund management service cannot be partly VAT-exempt. The outcome of this judgment is not only important for taxpayers that are involved with investment funds, but also for providers and purchasers of other types of composite services.
The taxpayer—a member of a VAT group established in the UK—plays the role of the representative of the group that includes a number of companies engaged in fund management activities. The taxpayer manages special investment funds as well as other funds. The special investment funds constitute the minority of the funds managed (by both volume and managed assets).
For the management of all its funds, the taxpayer receives supplies of services from a company established in the United States. This company provides services through an IT platform. The services include a combination of hardware, software and human resource-related services. More specifically, the 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. These services are considered as a “single supply” regarding the specific funds. The taxpayer applied a reverse-charge mechanism and considered that the VAT exemption for management services (Directive 2006/112/EC) applied to the portion of the services related to special investment funds. The taxpayer therefore only applied VAT on the remainder (services provided by the U.S. entity to other funds) and calculated an apportionment based on a pro-rata in accordance with the amount of the other funds within the total of the funds managed.
The UK tax authority disagreed with this method and issued recovery notices; the taxpayer contested this issue before the UK courts. A UK court made a preliminary reference to the CJEU, for a judgment as to whether there can be a “single supply of management services” provided through a software platform belonging to a third-party supplier for the benefit of a fund management company that manages both special investment funds and other funds. If the answer to this question is yes, the question on how to apply the VAT exemption may then be answered.
The CJEU first noted that VAT exemptions must be interpreted strictly. Next, concerning the “single supply” rule, the CJEU looked to its earlier case-law to find that there are two types of situations:
- The first situation being when one or more elements of a supply must be regarded as ancillary to a principal service (as they do not necessarily constitute an aim in themselves in acquiring the service/the good for the customer)
- The second situation being that inseparable elements of a single supply may be placed on the same footing, so that one cannot be considered as the principal service in comparison to the other
The CJEU expressed its opinion that in the present case because it was not clear whether a distinction within the supply provided by the platform was possible or not, this would mean that all the services rendered via the platform appear to be equally necessary to allow investment transactions to be made under good conditions. Therefore, the CJEU concluded that the supply must be viewed as having different elements, all of them being on the same footing and hence the second situation was triggered.
According to the CJEU judgment, a single supply made of different elements must be subject to only one VAT rate, as applying different VAT rates to the same supply would lead to an artificial split of the transaction at hand. Based on these findings, and considering that the supplies do not fulfill the conditions to qualify for the VAT exemption applicable under the VAT Directive, the CJEU concluded that the entire supply must be subject to VAT and that the single supply of management services must be considered to be taxable.
Read a July 2020 report prepared by the KPMG member firm in Luxembourg
Read a July 2020 report prepared by the KPMG member firm in the Netherlands
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