Written on 26/06/2020


Tatton announced last week they had a refund from HMRC as it was agreed that its model portfolios were exempt from tax; this finding could / should ‘shake up’ how VAT is applied in DIM.  The ‘finding’ came to light via a press release from Tatton regarding their profitability so unfortunately, the reasons why their portfolios are VAT exempt is not given.

VATFIN7600 is particularly clear on the point about DIM being a service;

…‘regardless of how it is remunerated, there is no exemption for the introduction of the client to a discretionary investment management service because discretionary investment management is a taxable service that does not fall within the financial services exemptions."

The service provided by the IFA is a taxable introduction to a taxable management service. It is not correct for IFAs to look through to the selection and purchase of VAT exempt assets by the discretionary investment manager and treat their services as being exempt introductions to a series of VAT exempt transactions.’

The original offering of discretionary investment management was for high net worth individuals where the investment managers offered bespoke portfolios tailored to individual needs; it was clearly a service offering and VAT was applied. Over time, this has evolved in style and application.  The options of model portfolios / OEIC related offerings managed on discretion via a Provider or multiple platforms has ‘complicated’ the VAT position.

Via an EU directive, VATFIN5100 outlines the management of special investment funds (SIFs) that are exempt from VAT to enable a level playing field for similar collective investment undertakings (CIU) such as;

  • Authorised unit trust schemes (AUTs)
  • Open-ended investment companies (OEICs)
  • Closed-ended investment funds, such as investment trust companies (ITCs)
  • Authorised Contractual funds (ACFs) 

[‘An ACF is an authorised contractual arrangement to pool assets. It has no legal personality and does not constitute an entity in its own right. The assets are held and managed on behalf of a number of investors (participants) who are co-owners of the scheme. A contractual arrangement is transparent for the purposes of tax and the participants remain responsible for any tax due on their share of the income and gains in the fund. For this reason, an ACF is described as ‘tax-transparent’. There are two contractual fund types, the co-ownership fund and the partnership fund.’]

VAT Notice 701/49: Finance provides the definition of CIU;

‘CIU are in the business of collective investment that is they pool and invest capital raised from the public and do so for a fee or ‘management charge’. It is this management charge that is the subject of the VAT exemption. CIU may be constituted in various legal forms, but common to all of these is that investors hold shares or units in the CIU.’

It goes on to provide the meaning of ‘management’

The term ‘management’ also includes certain activities of administering the CIU as well as investment management of these assets.

Based on these definitions, there are two possibilities;

  1. If a DIM has their own OEIC the fees are vat exempt,
  2. Where there is a ‘pooling of assets’ to create model portfolios managed on discretion, the fees are vat exempt

Given the clarity of VATFIN7600, VAT is still applicable where an individual client has a bespoke portfolio managed on discretion where there is no pooling of assets.

As IFAC announced on 19th June 2020, it is worth challenging your discretionary investment firm whether VAT should be charged. It is likely they will not be happy about being challenged on the basis that, if they have been charging VAT and shouldn’t have been.  If they admit to it the mother of all headaches will be coming their way as they try and sort out rebates to your clients.

Please note, this is IFACs understanding of the VAT position; IFAC welcome alternative views and healthy opposition as it is important a consensus and understanding is reached.

In March 2020, FTAdviser reported that as part of the Budget for 2020, the Government are going to do a review into fund fees so greater clarity may be provided if this is still the case SEE HERE

UPDATE 11th August 2020

see article in The Times, dated 10th August, headlines reported here

Court of Justice of the European Union
Published August 10, 2020
Blackrock Investment Management (UK) Ltd v Revenue and Customs Commissioners
(Case C-231/19)

Before J-C Bonichot, President of the Chamber (Rapporteur) and Judges M Safjan, L Bay Larsen, C Toader and N Jääskinen
Advocate General: P Pikamäe
Judgment July 2, 2020

A single supply of management services, provided by a software platform belonging to a third-party supplier for the benefit of a fund management company, which managed both special investment funds and other funds, did not fall within the exemption from VAT applicable to the management of special investment funds.

The Court of Justice of the European Union so held on a preliminary ruling on a reference from the Upper Tribunal (Tax and Chancery Chamber) in proceedings between BlackRock Investment Management (UK) Ltd and the Revenue and Customs Commissioners concerning the revenue’s refusal to grant BlackRock exemption from value added tax for the management of special investment on in The Times

All news