UK: Is Investment Advice Exempt From VAT?

Last Updated: 22 March 2013
Article by Michael Cant

Summary and implications

The Advocate General (AG) has opined in the case of GfBK Gesellschaft für Börsenkommunikation mBH v Finanzamt Bayreuth that investment advice provided to an investment fund constituted an activity of management and therefore benefitted from VAT exemption. The main points are as follows:

  • An advisory service provided by a third party relating to the management of a fund constitutes an activity of management, if specific and distinct in nature.
  • The principle of fiscal neutrality was not breached as it was not sufficiently engaged in this case.
  • A strict interpretation of the definition of "management" would result in an increase to the final costs for investments.

It remains to be seen whether the CJEU will follow the opinion of the AG.

Background

Management fees in relation to special investment funds are exempt from VAT under Article 13B of the Sixth VAT Directive. This exemption has been implemented in the UK under the Value Added Tax Act 1994 and applies to investment trust companies, open-ended investment companies and authorised unit trusts.

Facts

A German advisory company (BK) provided marketing advice and financial recommendations to an investment fund (IMC) between the period 1999 and 2003. BK was engaged to advise IMC "in the management of the fund" and make recommendations for the acquisition or sale of securities. BK sent specific "buy or sell" recommendations to the fund with no detailed reports or analysis as to why the advice provided should be taken. IMC then implemented the recommendations after an analysis of whether the recommendation contravened any statutory limits. It is notable that IMC consistently followed the advice given. The German tax authorities took the view that the services provided were not exempt and they did not constitute the "management" of funds within the meaning of Article 13B. BK appealed the decision up to the German Supreme Court which subsequently referred questions on the interpretation of Article 13B to the CJEU.

Questions referred to the CJEU

The German Supreme Court asked the following questions:

For the purpose of interpreting the term "management of special investment funds", is the service provided by the third party managers of a special investment fund sufficiently specific and hence exempt from taxation only if:

  1. the manager performs a management function and not only an advisory function?
  2. the service differs in nature from other services by reason of a characteristic feature that qualifies for tax exemption under this provision?
  3. the manager operates on the basis of a delegation of functions under Article 5G of the Directive relating to Undertakings for Collective Investment in Transferable Securities (UCITS Directive)?

Analysis

The AG relied on the reasoning of the landmark Abbey National case which is set out below:

  • The objective of the exemption is to ensure fiscal neutrality between investors who manage their portfolios directly and those who have collective investment through a management or investment company.
  • The court must examine Annex II of the UCITS Directive which sets out administrative services which fall under the definition of "management" for the purposes of the exemption. This list is not exhaustive.
  • The court must not look at who is performing the services but rather the nature of the services provided. Management services for funds need not be provided by a single fund manager but can be broken down into separate services provided by third parties. This does not preclude the services falling within the definition of "management".
  • When viewed broadly the services must form a "distinct whole fulfilling in effect the specific, essential functions of a service" in other words, the management of a common fund.

The last point is of particular significance to the case and from it the AG deduced the following:

  • There must be an intrinsic connection between the service provided by BK and the activity carried out by the fund.
  • There must be a significant degree of autonomy regarding the content of the service supplied by BK. Therefore, the fund must not already perform the service itself.
  • The service must be continuous, or at the very least foreseeable over a period of time.
  • It was not relevant whether the third party service brought about a change in the legal or financial position of the fund.

The AG supported the view that there was an intrinsic connection between the services provided by BK and the activities of the fund. It was irrelevant that the activities of providing advice and information were not included on the list of administrative services, in Annex II, which are considered "management". The autonomy requirement was also satisfied as the advisory service provided by BK was not also performed by the fund itself. The service provided to IMC was essential in that the fund consistently followed the recommendations given. The continuity condition was similarly satisfied.

The AG therefore followed the Abbey National decision in dismissing the tax authorities' argument that "legally relevant" decisions were made only by the fund and not by BK. The AG held that it was sufficient that there was an outsourcing of management activity and it was not necessary for this to result in a change in the legal or financial position of the fund.

The AG briefly touched on the principle of fiscal neutrality and held that by granting an exemption to BK the principle would not be infringed. The position of direct investors, who did not use third party advisory services, were not in a sufficiently comparable position to that of the fund to engage the principle of fiscal neutrality.

Next steps

It remains to be seen whether the CJEU will follow the wide construction taken by the AG. However, the fund industry will welcome the supportive approach of the AG to the VAT exemption in any event. If the CJEU choose to apply stricter criteria for the application of the VAT exemption this may have serious implications for fund formation in territories such as Luxembourg, who currently apply a wide VAT exemption for investment advice provided to a qualifying fund.

It is hoped, that the AG's opinion will be followed by the CJEU, but this is not certain. The decision of the CJEU is expected in early 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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