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VAT & Portfolio Management Services

This article provides a summary of the Opinion of the Advocate General in the case of Finanzamt Frankfurt am Main V-Höchst v Deutsche Bank AG (Case C 44/11).

Key Points from the judgement

The Advocate General considered that the services offered by DFM fell into three categories:

(i) deciding, on the basis of expert knowledge and observation of the markets, what securities should be bought or sold, and when;

(ii) implementing those decisions by actually buying and selling the securities; and

(iii) a series of more administrative services connected with holding the securities.

The Advocate General’s Opinion considered that:

  • whilst the services supplied by DFM may individually fall within one or more of the exemptions, the services provided by DFM were not independent of each other and should be considered as a whole, as a single service for the customer; and
  • for an exemption to apply under the Directive the interpretation of any exemption must be construed strictly ‘as an exception to a general rule’.

In the Opinion of the Advocate General the services provided as a whole did not fall within any one exemption provided for under the Directive and that services provided to persons other than specified funds by DFM should be subject to VAT.

The Judgement of the European Court of Justice

The final judgement of the European Court of Justice (ECJ) was issued on 19 July 2012 confirming that the entire DFM service is VATable.

Some Member States, before the issuance of the judgement exempted DFM services from VAT. For example, the Republic of Ireland where the Irish Treasury had previously confirmed that the discretionary management of funds within an offshore bond by an authorised life assurance company in the Republic of Ireland is exempt under sub paragraph 6(1)(g) of Schedule 1of the Irish VAT Act (now amended to Sub-paragraph 6 (2) of Part 2 of Schedule 1 of the Irish VAT Consolidation Act 2010).

This approach is inconsistent with the ECJ judgement. VAT could be chargeable in the future unless the Irish Treasury maintains the stance that life assurance policies are designated as specified funds and therefore continue to be exempt from VAT. The Irish Treasury has not made such a statement but continues to maintain their exemption in their VAT Act still applies to Discretionary Management of funds.

UK VAT for certain portfolio management fees

In the UK under the VAT Act 1994, discretionary services were subject to VAT but dealing fees and commission involved in discretionary services were exempt.

The UK HM Revenue and Customs (HMRC) issued a circular (149-13) on 25 June 2013 which changed the VAT treatment of certain supplies made by portfolio investment managers.

As a result of the judgement, HMRC confirmed 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.

As the judgement 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 have confirmed that where fees are charged strictly on a transaction by transaction basis (that is, per purchase or sale of investments) the VAT 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.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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