Changes to the VAT treatment of discretionary fund management services

HMRC have now published their guidance in response to the decision of the ECJ in the Deutsche Bank case.

The Deutsche Bank case involved the VAT treatment to be applied to discretionary fund management services and the court held that discretionary fund management was a single supply of taxable fund management services and that all charges made in the context of that service would be subject to VAT even where they were for execution services. Historically HMRC have allowed a concession whereby a proportion of the charge for a discretionary fund management service could be split out as relating to execution services and that this separate charge would be exempt from VAT.

The decision in Deutsche Bank obviously cast into doubt the validity of the treatment applied to separate charges for execution services in the context of an overall discretionary fund management service.

HMRC have adopted a wait and see policy since the publication of the Deutsche Bank decision however they have now published a Brief that confirms where portfolio managers charge fees on an annual or other periodic basis for effecting the purchase and sale of securities  these fees can no longer be treated as being exempt from VAT.

However where fees are charged on a transaction by transaction (that is per purchase or sale of investments) basis the exemption will continue to apply. The fees would still have to be separately split out.

If you have relied on the historic treatment it would be prudent to review your agreements to confirm whether exemption can still apply to arrangement/execution fees or whether it is necessary to amend agreements to ensure these charges still qualify for exemption.

We would be delighted to discuss the impact of these new changes with you and if you have any questions please do not hesitate to contact us.