Determining the VAT rate of supplies in the financial services industry

Supplies of qualifying financial services are exempt from VAT.  This can include supplies of related services, such as intermediation and certain management services.  The principal VAT issue for those making supplies in the financial services industry is how to determine whether a service takes on the exemption of the overarching financial service to which it contributes.

This a complex and technical VAT issue, but the result itself is also of critical importance for suppliers.  Consider a financial adviser, fund manager, introducer, analyst, administrator, etc. charging VAT to a private individual or an exempt financial customer.  These customers cannot recover the VAT charged to them.  Consequently, either the price of the services increases for the customer or, if the price remains unchanged, the supplier’s profits decrease.  Exemption is often the difference between a viable service line and an unprofitable one.

On 7 March 2013, the CJEU issued judgments in two cases which demonstrate the difficulties in determining the correct VAT rate.

  • GfBk Gesellschaft für Börsenkommunikation mbH v Finanzamt Bayreuth [C-275/11]
  • Wheels Common Investment Fund Trustees Ltd and others v Revenue and Customs Commissioners [C‑424/11]

GfBk provided financial advice to a fund manager.  The management of a fund open to investment by the public is exempt.  The CJEU ruled that the financial adviser’s services were part of the overarching management activity of a qualifying fund.  The financial adviser’s services were therefore exempt too.

Wheels managed a pension fund.  However, the CJEU ruled that the pension fund was not a qualify fund, as it was not open to investment by the public.  Wheels was therefore required to charge VAT on its management services to the fund.

In addition to affecting the taxpayer’s profitability, the distinction between the two cases highlights the complexity of the VAT issues facing suppliers in the financial services industry.  For example, the financial adviser GfBk can now exempt its supplies to its fund manager customer, but would be required to charge VAT if it supplied identical services to Wheels.

This is just one of the many VAT issues a financial adviser might have to resolve.  Even when it is clear that the customer manages a qualifying fund, are the adviser’s services exempt as part of the overarching management activity?  Similarly, for a financial adviser introducing buyers of financial services to suppliers, does the adviser’s activity qualify as exempt financial intermediation?  Even then, the adviser must determine whether any advisory elements are also exempt as part of that overarching financial intermediation.  These are not straightforward issues.

For further information on the VAT exemptions for services in the financial industry, please contact the TaxDesk on 0845 4900 509 and ask for Kevin Hall.