UK and International Tax news

VAT Treatment of Portfolio Management Fees

Monday 8th July 2013

HMRC has recently issued Business Brief 11/13 in which it announces a modification to the current VAT treatment of certain supplies made by portfolio investment managers. This modification is needed to bring the current treatment into line with the European Court judgment in the case of Deutsche Bank (C-44/11).

Deutsche Bank provided discretionary portfolio management services to individual investors, consisting of two elements:

(i) the activity of analysing and monitoring the assets owned by the investors in accordance with a strategy agreed with them, and

(ii) the consequential activity of actually purchasing and selling financial securities on their behalf.

The investors paid a single annual portfolio management fee which included a separately identified charge for buying and selling securities.  The issue before the Court was whether this charge constituted consideration for a separate exempt supply.  The Court decided that, in the circumstances, the two elements were parts of a single service and, as those elements were of equal weight and together formed a single supply of taxable portfolio management services, the entire fee was subject to VAT at the standard rate.

Whilst all portfolio management services are subject to VAT, the UK currently treats separate charges for effecting the purchase and sale of securities as exempt from VAT on the basis that they are consideration for separate supplies. This policy is set out in HMRC’s Notice 701/49 Finance and in section VATFIN5800 of their VAT Finance guidance manual.

As a result of the judgment, HMRC now states state that fees charged by portfolio managers on an annual or other periodic basis for the purchase and sale of securities can no longer be treated as exempt from VAT, regardless of whether or not a separate charge is made.

The ECJ in Deutsche Bank only considered the VAT position of periodic fees charged on a flat fee basis where there was no direct link to the transactions being executed.  HMRC now confirms that where fees are charged strictly on a transaction by transaction basis, exemption will continue to apply.  This is conditional upon the portfolio management services being contracted for on that basis and the transaction charges being separately identified in any VAT invoice. This VAT treatment will apply irrespective of whether the portfolio is managed on a full discretionary or on an advisory basis.

Portfolio management services can be distinguished from other financial advisory services where there is an ongoing commitment to monitor and manage an individual client’s investment portfolio to formulate investment decisions or recommendations. They should also be distinguished from investment fund management services (i.e. the management of pooled investments within a fund structure) where VAT exemption is dependent upon the nature of the fund being managed.

The revised VAT treatment is to apply from 1st December 2013.

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