VAT on management services of investment funds: Opinion of the Advocate General in the important Blackrock case has been saved
VAT on management services of investment funds: Opinion of the Advocate General in the important Blackrock case
16 March 2020
On 11 March 2020, the Advocate General of the Court of Justice of the European Union (CJEU) delivered his opinion on the case Blackrock Investment Management UK Ltd (C-231/19). He opines that a single supply of management services to a fund management company, which itself manages both investment funds eligible to receive VAT exempt management services and other funds, does not fall within the scope of the fund VAT management exemption. Interestingly, his opinion seems, at least in part, based on the particular fact pattern, the supposed incapacity of distinguishing between services used for the two different categories of funds, and opening the door to a possible application of the fund VAT management exemption to highly sophisticated and automated asset management assistance services (e.g. artificial intelligence). The Court should issue its judgement in the second half of 2020. In the meantime, concerned businesses should envisage the potential impact of this case and review the contractual arrangements of services they render and they receive.
Blackrock Investment Management UK Ltd (Blackrock UK) manages a number of investment funds. Some of the funds qualify under the UK law for the exemption provided by Article 135 (1) (g) of the EU VAT Directive for the “management of special investment funds” (Article 44.1.d ) of the Luxembourg VAT law. Blackrock UK also manages funds that are not eligible for the exemption. The portion of services rendered to non-eligible funds exceeds the services to eligible funds.
Blackrock Financial Management Inc. (BFMI), which is based in the US, provides Blackrock UK with so-called “Aladdin” services. Aladdin is a sophisticated and automated software that assists asset managers in the whole cycle of their activities. We could thus regard Aladdin as “artificial intelligence”.
Blackrock UK uses Aladdin to render services to two fund categories, i.e. those eligible to receive VAT exempt services and non-eligible ones. The question arises whether Blackrock UK should self-assess the VAT on these services or only on the part of Aladdin services used to render services to funds non-eligible to the fund VAT exemption.
The UK First Tier Tribunal in 2017 and the UK Upper Tribunal both decided that BFMI could, in principle, be VAT exempt as management of special investment funds. However, they consider that BFMI is a single supply used for the management of both funds eligible to the VAT exemption. Therefore, this single service could not benefit from the VAT exemption.
In December 2018, the Upper Tribunal referred questions to the Court of Justice of the European VAT over whether it is possible to allocate the charges for Aladdin, treated as consideration for a single supply, between eligible funds (exempt) and other funds (taxable). The Tribunal noted that CJEU cases such as EC v Luxembourg (exemption for the Independent Group of Person exemption (C-274/15)) suggest that an apportionment may be possible between the exempt and taxable elements of a single supply, and the questions referred sought to determine whether and how this is possible.
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
First, the Advocate General, Mr. Priit Pikamäe, indicated that he assumes that the Upper Tribunal decision regarding the VAT treatment of Aladdin services is correct, i.e. that services provided by BFMI are specific to and essential for the management of investment funds and that the supply does in fact constitute a single indivisible supply.
The Advocate General thus focused on the apportionment question. This may seem obvious when considering the questions posed. However, we should note that, during the hearings on 19 December 2019, the different parties (Blackrock UK, the UK government, and the EU Commission) extensively discussed the question of the VAT exemption.
On whether the supply should be subject to a single rate of tax, the Advocate General noted that the CJEU jurisprudence does not allow, in principle, to split a single supply across different VAT liabilities. He added that some exceptions to this principle exist, but 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 to treat part of the single supply as exempt and part as taxable, the Advocate General considered that the case of EC v Luxembourg (C-274/15) is not relevant because it deals with another VAT exemption (exemption for the Independent Group of Person) due to its very precise and specific wording.
He also considered that accepting the application of the exemption to a part of Aladdin services would risk applying the exemption (even if only in part) to the management of non-eligible funds. This would be against the principle of strict interpretation of the VAT exemptions.
He also 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 an 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 eligible funds under management would fail to interpret the exemption correctly as the directive exempts transactions relating to the management of investment funds. We do not need to emphasize that the invoicing based on the value of the assets under management is the most usual invoicing method in the asset management industry. In this respect, the Advocate General approach seems thus rather theoretical and not taking into account the business realities.
However, the Advocate General commented that had Blackrock UK been able to provide detailed data, which enabled a tax authority to identify precisely the services provided specifically for funds eligible to the VAT exemption, then those services would be exempt.
While such data was absent in the case at hand—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.
Consequently, the Advocate General concludes that management service to a mixture of eligible and non-funds as a single supply should be subject to VAT in its entirety.
Some may consider the Advocate General’s conclusions disappointing for the asset management industry because it may complicate the VAT treatment of outsourced services and may imply additional VAT costs.
Others may say that he opens the door to the application of the VAT exemption on automated asset management assistance services and that the denial of the VAT exemption is rather based on practical considerations than on principle ones. Should it be exact, this would be encouraging for the VAT treatment of artificial intelligence in the asset management industry, and, more generally speaking, in the financial services industry.
The next step is for the CJEU to issue its judgment, which is normally four to six months following the conclusions of the Advocate General, so we would expect this to arrive during the second half of 2020.
Should the Court follow or not the Advocate General’s opinion, its decision may have significant impact for the asset management industry. In the meantime, concerned businesses should review if the decision of the Court may affect them and to review the contractual arrangements of services they render and receive.