Investment Management Services – CJEU update | Indirect Tax Matters May 2020
Advocate General Opinion in the Blackrock Investment Management (UK) Ltd case regarding investment management services
In Blackrock Investment Management UK Ltd, AG Priit Pikamäe has opined that a single supply of management services to a third party fund management company which itself manages both special investment funds and other funds, should be subject to a single rate of tax and does not fall within the scope of the exemption under Article 135(1)(g).
The CJEU will issue its judgment, which should be in the second half of 2020, before returning the case to the UK Courts. The clear outcome reached in this Opinion means taxpayers are unlikely to be able to apply the exemption where a single supply relates to both SIFs and other funds. However, the Advocate General has not questioned the availability of the exemption where only SIFs are being managed.
Blackrock Investment Management UK Ltd ("Blackrock UK") manages a number of investment funds. Some of the funds qualify as Special Investment Funds (“SIFs”), and their management is exempt; most of the funds, however, are not SIFs, and their management is taxable.
The investment management is supported by Aladdin, a sophisticated software package that is licensed to Blackrock by Blackrock Financial Management Inc. ("BFMI"), which is based in the US.
At the UK First-tier Tribunal (“FTT”) in 2017, it was concluded that, in principle, the service received by Blackrock UK was capable of being ‘management’ for the purpose of the VAT exemption for SIF management. However, as the single supply was used for the management of both SIFs and other funds, the exemption was not available.
In December 2018, the UK Upper Tribunal (“UT”) confirmed the FTT’s judgment that the supply could constitute the management of a SIF, but referred questions to the CJEU over whether the charges for Aladdin, treated as consideration for a single supply, could be apportioned between SIFs (exempt) and other funds (taxable). The UT noted that CJEU cases such as EC v Luxembourg (on the cost-sharing exemption) suggest that an apportionment might be possible between the exempt and taxable elements of a single supply, and the questions referred sought to determine whether and how this could be done.
On the proper interpretation of Article 135(1)(g) of Council Directive 2006/112/EC, where a single supply of management services within the meaning of that Article is made by a third-party provider to a fund manager and is used by that fund manager both in the management of special investment funds ("SIFs") and in the management of other funds that are not special investment funds ("non-SIFs"):
(a) Is that single supply to be subject to a single rate of tax? If so, how is that single rate to be determined? or
(b) Is the consideration for that single supply to be apportioned in accordance with the use of the management services (for example, by reference to the amounts of the funds under management in the SIFs and non-SIFs respectively) so as to treat part of the single supply as exempt and part as taxable?
Summary of Opinion
AG Pikamäe’s Opinion assumes that the UT tribunal decision (that services provided by Blackrock are specific to and essential for the management of SIFs and that the supply does in fact constitute a single indivisible supply) is correct.
On whether the supply should be subject to a single rate of tax, he notes that while there is previous case law setting out the ability to split a single supply across different VAT liabilities, the general principle holds unless the facts of the case can be considered in the context of case-law exceptions. In doing so, he cited the cases of Talacre Beach Caravan Sales (Case C-251/05) and Commission v France (Case C – 94/09), where in both instances he considers that the case in hand did not concern either of the exceptions to the general principle.
When considering approaches for apportioning the supply so as to treat part of the single supply as exempt and part as taxable, there were a few separate points raised:
(i) The Upper Tribunal’s suggestion that the case of EC v Luxembourg (Case C-274/15) meant that an apportionment might be possible between the exempt and taxable elements of a supply was dismissed, as in his view this exemption is dependent on its precise wording. The fact that the exemption for the Independent Group of Person references “shares” recharged to members is deliberate and draws a clear difference with the fund management exemption that has no such reference. As such, the principles considered by the CJEU in that case cannot apply.
(ii) The AG’s view is that extending the exemption to the fund management supply as a whole would risk applying the exemption (even if only in part) to the management of non-SIFs and therefore undermine the purpose of the exemption, which must (as with all exemptions) be construed narrowly.
(iii) He rejected Blackrock UK’s argument that a pro rata calculation could be applied to the value of assets under management. Not only did he feel that a pro-rata apportionment based on fund value would be practically unworkable, he was also of the opinion that applying the exemption according to the assets of the SIF under management would fail to interpret the exemption correctly as the directive exempts transactions relating to the management of SIFs.
Consequently, the management of a mixture of SIFs and non-SIFs as a single supply must be subject to VAT in its entirety.
Beyond the approaches proposed for apportioning the supply, the AG noted the overall complexity associated with apportioning a supply of this nature on the basis that it appears difficult to isolate distinct elements of a software platform.
However, the AG did comment that had Blackrock UK been able to provide detailed data which enabled a tax authority to precisely identify the services provided specifically for SIFs, then those services would be exempt. While such data was absent in the case of Blackrock UK - making the observation purely hypothetical - it will be interesting to see if the CJEU judgement comments on the extent to which exemption could apply, should it be possible to identify the split of services.
The next step is for the CJEU to issue its judgment, which is normally four to six months following an AGO, so we would expect this to arrive during the second half of 2020.
Should the CJEU follow this opinion it will therefore be essential to determine if it is possible for a manager to receive separate supplies of these services, to segregate those used for SIF management into a separate supply.
On a related note, details of two CJEU references from Austria on the exemption for the management of SIFs have been published on the CJEU website.
DBKAG (C-59/20) is asking whether SIFs can be “managed” by specialist software, where the software is “specific and essential” to managing the fund, runs on the investment management company’s systems (with minor participation by the IMC), and uses market data provided by the IMC. In summary, it is revisiting the questions that AG Pikamae was keen to address in Blackrock, but which the UK courts had not asked for any guidance on.
Finanzamt N (K) (C-58/20) will consider the liability of tax services relating to fund management. The IMCs were under a statutory duty to provide information to unit-holders to allow them to comply with their tax obligations, and outsourced this to K. The CJEU will rule on whether this outsourced service amounted to “management” of a SIF in its own right.