On 2 July 2020, the Court of Justice of the European Union (the CJEU) published its decision in the case of BlackRock Investment Management (UK) Ltd vs Commissioners for Her Majesty’s Revenue and Customs. The decision has implications for the VAT treatment of exempt management services supplied to Irish fund management companies who manage both regulated and unregulated funds (Case C-231/19).
Impact for Fund Management Companies
Under EU VAT law, the management of special investment funds or SIFs (in the case of Ireland, SIFs are UCITS or AIFs authorised by the Central Bank) is an exempt activity whereas the management of non-SIFs is subject to VAT. Following the recent CJEU decision, UCITS managers and AIFMs managing both SIFs and non-SIFs should review commercial agreements and invoicing procedures in place to ensure such agreements and procedures clearly differentiate between services provided in respect of SIFs and non-SIF clients. Where service provider agreements distinguish between services in respect of SIF and non-SIF clients of the fund management company (and where the remuneration and invoicing processes reflect this position) the CJEU decision indicates a basis for the VAT exemption to continue to apply in respect of third party services supplied to fund management companies in respect of its SIF clients.
BlackRock Investment Management (UK) Limited (BlackRock UK) manages both SIFs and non-SIFs. BlackRock UK appointed BlackRock Financial Management Inc (BlackRock US), a group company in the US, to provide investment management services via an IT platform known as Aladdin. The dispute that arose between BlackRock UK and Commissioners for Her Majesty’s Revenue and Customs (HMRC) was whether the services provided via Aladdin constituted the management of SIFs (and therefore VAT exempt services).
BlackRock UK used the service received from BlackRock US in carrying out its activities involving the management of SIFs and non-SIFs. Given that the services supplied were provided from outside the UK, the UK VAT position was determined under the reverse charge mechanism.
BlackRock UK accounted for UK VAT on the proportion of the Aladdin services referable to the non-SIFs it managed, treating the proportion referable to SIF clients as exempt in line with EU VAT law. This proportion was determined based on the value of non-SIF assets to the total value of assets under management. HMRC disagreed with this approach and issued recovery notices.
BlackRock UK appealed this decision before the First-tier Tribunal (FTT) in the UK. The FTT dismissed the appeal. The FTT considered that the services provided via Aladdin to SIF clients were fund management services that fell within the exemption, however the application of VAT on a pro rata basis for services provided for non-SIF clients was not possible since the supplies from BlackRock US constituted a single supply (encompassing services used for both SIF and non-SIF clients).
BlackRock UK further appealed to the UK Upper Tribunal (UT) who referred the question of how the supply of services to a fund manager may be VAT exempt, where those services are intended to be used simultaneously to manage SIFs and non-SIFs, and in particular, whether the taxable value of the supplies can be apportioned according to the value of the assets in the funds.
In his opinion, the AG noted that granting the exemption for a supply of services which are used for both SIFs and non-SIFs would have the effect of departing from case law decisions requiring that the management services provided when viewed broadly, form a distinct whole, are specific to, and essential for, the management of SIFs. Also, the AG considered the exemption could not apply pro-rata based on the assets under management as the exemption relates to ‘transactions’ consisting in the ‘management of ’ and not according to ‘the assets of the SIFs under management’.
The AG did, however, stress that in other circumstances the exemption could possibly be granted to services provided by a third party to a fund manager, where the supplier of the services provides detailed data which enable the tax authority to identify, precisely and objectively, the services provided specifically for SIFs.
In its decision, the CJEU followed the approach in the AG’s Opinion regarding the notion of a single supply and confirmed that the Aladdin services must be seen “as forming a single indivisible economic supply” and must be subject to one and the same VAT treatment (i.e. the supply cannot be partially exempt and partially VATable). The CJEU stated that the decision to apply the specific VAT exemption for fund management of SIFs must be based solely on the nature of the services supplied (and not on their uses, or on the nature of the majority of funds under management i.e. SIFs or non-SIFs). The CJEU concluded that a single supply of management services for the benefit of a fund management company, which manages both SIFs and non-SIFs, is not VAT exempt even where the same services provided only in respect of SIFs would otherwise be exempt.
If you have any queries on the issues discussed in this article, please contact the Asset Management & Investment Funds team or your usual William Fry contact.
Contributed by Nessa Joyce