On 26 June 2013, HMRC issued Brief 11/13 regarding VAT and financial services. The Brief reviews a CJEU decision that portfolio management services should be taxable and then provides portfolio management businesses with the means to get around that decision.
Supplies of qualifying financial services are exempt. However, many of the administrative and advisory services in the financial service industry do not qualify for the exemption and remain taxable. In practice, services supplied to clients are usually a mix of qualifying and non-qualifying services, and it can be difficult to determine which are exempt and which are standard-rated.
In the CJEU case of Deutsche Bank AG (C-44/11, issued 19 July 2012), the supply of portfolio management services for a flat fee was a mix of exempt services (purchasing and selling securities for the client) and standard-rated services (analysing and monitoring the client’s assets).
The taxpayer argued that the services constituted a single supply, whose principal element was the purchase and sale of securities, and should therefore be exempt. The German authorities argued that the principal element of portfolio management was the analysis and monitoring service, and that the overall single service should be taxable at the standard rate.
The CJEU stated that neither element was ancillary to the other, but that the two principal elements combined to form a single supply which it would be artificial to split. The nature of the overall portfolio management services is distinct from both its elements and the CJEU found that the exemption for the security-trading element cannot apply. As a result, the CJEU ruled that Deutsche Bank’s portfolio management services are standard-rated.
This represents a change to the standard practice in the UK. Discretionary portfolio management services supplied for a flat fee (e.g. for fixed periods) will no longer be two services, with exemption applying to charges for security-trading. This change will not come into effect in the UK until 1 December 2013, so there is time to restructure existing portfolio management services.
Importantly, HMRC’s new policy in Brief 11/13 distinguishes the CJEU decision from cases where portfolio management businesses do not charge a flat fee for security-trading, but instead charge on a transaction by transaction basis. HMRC’s policy is that such services will be exempt, as being separately supplied from the standard-rated services of analysing and monitoring the client’s assets.
Businesses should now consider a review of their portfolio management service models in the light of HMRC’s new policy. Indeed all businesses involved in the financial services industry should be considering their VAT position, particularly given the number of VAT changes in this area in recent years – see, for example, our previous articles:
VAT exemption for financial advice (5 March 2012)
VAT and the financial services exemption (7 June 2013)