In BlackRock Investment Management (UK) Ltd v HMRC (C-231/19), the Court of Justice of the European Union (the “CJEU”) held that management services provided by a financial technology services platform for the management of a mix of special investment funds (“SIFs”) and other investment funds (“Non-SIFs”) could not benefit from the investment management exemption contained in Article 135(1)(g) of the Principal VAT Directive (the “IM Exemption” and the “Directive” respectively). The CJEU held that this was so even in so far as the services were utilised by SIFs, on the basis that the supply was a single supply and its taxability was not determined by reference to the use to which the services were put (hence there could be no apportionment of the supply by reference to use of the supply for the provision of investment management services to SIFs and Non-SIFs).
As a result of the decision, fund management groups will need to consider whether an investment manager in a separate VAT group should be established to provide the investment management services to SIFs (to access the IM Exemption ).
Article 135 of the Directive sets out a number of categories of transactions which Member States are obliged to exempt from VAT. Article 135(1)(g) provides that Member States should exempt “the management of special investment funds as defined by Member States”.
In the UK, Article 135(1)(g) has been implemented in the Value Added Tax Act 1994 (“VATA”). Section 31 VATA provides that supplies of goods or services of a description specified in Schedule 9 VATA are exempt. Items 9 and 10 of Group 5 of Schedule 9 detail the special investment funds the management of which are exempt in the UK.
BlackRock Investment Management (UK) Limited (“BlackRock”) was the representative member of a VAT group which included a number of companies carrying on business as fund managers. BlackRock managed a range of investment funds, only some of which were SIFs. From BlackRock Financial Management Inc (“BFMI”) (a member of the same commercial group), BlackRock received services performed by and through a platform called Aladdin (the “Services”). The Services included performance and risk analysis, and monitoring of regulatory and compliance risks, to assist in the making of investment decisions by portfolio managers. The Services were used by BlackRock’s portfolio managers for the management of SIFs and Non-SIFs.
Since BFMI was incorporated outside the EU, BlackRock was required to account for VAT on the Services under the reverse charge mechanism. Between 1 January 2010 and 31 January 2013, BlackRock considered that the Services were exempt from VAT under Article 135(1)(g) of the Directive in so far as the Services were used in the management of SIFs. Accordingly, BlackRock accounted for VAT only on the Services used for the Non-SIFs, the value of those Services being calculated pro rata by reference to total funds under management. HMRC disagreed with the treatment applied by BlackRock and issued recovery notices covering the relevant period. BlackRock appealed to the First-tier Tribunal (Tax Chamber) (the “F-tT”).
The F-tT considered the following two issues:
- whether the Services were exempt under Article 135(1)(g) of the Directive (the “Exemption Issue”); and
- if the Services were exempt, whether the consideration for the Services could be apportioned in circumstances where they were used to manage both SIFs and Non-SIFs (the “Apportionment Issue”).
The F-tT agreed with BlackRock on the Exemption Issue and found that the Services qualified for the exemption in Article 135(1)(g). However, on the Apportionment Issue the F-tT concluded that the consideration could not be apportioned between the use by BlackRock to manage SIFs and Non-SIFs. Given that the majority of the funds managed by BlackRock using the Services were Non-SIFs, the single supply of the Services would be standard-rated.
BlackRock appealed to the Upper Tribunal (Tax and Chancery Chamber) (the “Upper Tribunal”) on the Apportionment Issue. In their response to BlackRock’s notice of appeal, HMRC challenged the F-tT’s conclusion on the Exemption Issue, arguing that the exemption would apply only where all or substantially all of a particular function of fund management was outsourced, and that the Services did not satisfy this requirement because no particular function had been outsourced.
The Upper Tribunal rejected HMRC’s outsourcing argument and found that the Services were “in principle” capable of being exempt under Article 135(1)(g). On the Apportionment Issue, the Upper Tribunal found that the matter turned on the construction of Article 135(1)(g), the wording of which did not preclude apportionment. The position could therefore be argued either way. As a result, the Upper Tribunal referred the issue to the CJEU.
In essence, the Upper Tribunal asked the CJEU to consider, in circumstances where a single supply of exempt services (under Article 135(1)(g)) is used for the management of both SIFs and Non-SIFs, whether the consideration for those services should be apportioned or a single rate of tax should apply (and how to determine that single rate).
As a preliminary matter, the CJEU noted that it had been established in the domestic proceedings that the Services constituted a single supply, and that it was not for the CJEU to determine the facts in a dispute before domestic courts. The CJEU therefore proceeded on the understanding that the Services were a single supply for the purposes of the reference.
The CJEU found that the present case was not one where a single supply could be regarded as including a principal supply and one or more ancillary supplies. The concept of a single supply comprising a principal and ancillary supplies distinguishes the supplies by reference to the different elements of the service, and not to the use of the service as contended by the UK. Further, it was not possible to distinguish the different elements of the Services: all the services provided by the Aladdin platform were equally necessary to the investment transactions and therefore the supply had to be regarded as a single supply comprising various elements of equal importance.
The Court also found that a single VAT rate had to be applied to the single supply in issue. (The general rule is that a single supply must be subject to a single rate of VAT, even in cases where the supply includes several elements.) The CJEU rejected BlackRock’s argument (relying on the CJEU’s judgment in Commission v Luxembourg (C-274/15)), that the general rule does not prevent the tax treatment of a single supply from differing depending on the different uses made of it. In that regard, the CJEU noted that Luxembourg was concerned with a different exemption (the cost-sharing exemption) and the wording of that exemption provided for a different tax treatment depending on the destination of the supplies of services concerned. The CJEU found that this was not the case in relation to the wording of Article 135(1)(g). The exemption in Article 135(1)(g) is defined exclusively in relation to the nature of the supply in question, therefore the wording does not permit the tax treatment of a single supply to be differentiated according to its uses.
In relation to the rate of VAT to be applied to the single supply, the CJEU held that the VAT rate to be applied could not be that of the principal supply because (as noted above) there was no such distinction between principal and ancillary supplies in the case. In addition, the CJEU held that the rate to be applied could not be determined by reference to the nature (i.e. SIFs or Non-SIFs) of the majority of the funds under management. The CJEU said that applying a single rate according to the majority of the use of the services could lead to the benefit of the IM exemption being enjoyed by the Non-SIFs if the majority of the funds under management were SIFs. Given that the exemption is defined according to the nature of the services provided and not according to the person supplying or receiving those services, such an outcome would be contrary to the principle that exemptions should be interpreted strictly.
Finally, the CJEU found that the Services were designed for the purpose of managing investments of various types of funds and were not sufficiently specific to the essential functions of managing SIFs (as required by the principles found in the relevant EU case law). Therefore the Services could not be regarded as specifically for the management of SIFs and did not meet the legislative conditions to benefit from the exemption in Article 135(1)(g) of the Directive.
The CJEU observed that its decision did not infringe the principle of fiscal neutrality. The CJEU said that the principle of fiscal neutrality is a principle of interpretation and not a rule that is hierarchically superior to the provisions of the Directive, and therefore the principle does not permit the scope of an exemption to be extended to a supply which does not meet the conditions of that exemption.
The CJEU’s judgment raises two practical issues for businesses receiving a single supply of services for mixed usage. First, unless specifically provided in the Directive, the concept of a single supply comprising of a principle and one or more ancillary supplies applies only by reference to the different elements within a supply and not to the different uses made of the supply. A single supply of services cannot be split into a number of supplies just because it is used for different purposes. Second, the nature of the service supplied, not its recipients, determines the rate of VAT. If the same service is used by a business for both exempt and non-exempt activities, it is important to consider the nature of the service to determine whether the service used by the exempt activities is sufficiently specific and essential to that exempt activity as required by the definition of the exemption and related case law.
In the light of this judgment, fund management groups will need to consider whether (and how) to separate the supply of management services to SIFs from that of Non-SIFs in order to avoid the loss of exemption of investment management services to SIFs under Article 135(1)(g) and Items 9 and 10 of Schedule 9 VATA.