The First-tier Tribunal has held that the provision of investment analysis services via computer platform can, in principle, fall within the exemption for the management of special investment funds (SIFs).
However, as the services here were primarily used for the management of non-SIFs and apportionment was held not to be possible, the supplies in question remained standard-rated. Asset management groups that manage both (i) ICVCs, AUTs, investment trusts or other SIFs, and also (ii) non-SIFs (e.g. managed accounts or limited partnership funds) might want to consider whether there is a more structural solution to the issue raised in this case.
Nature of the services provided
The services at issue here were provided to Blackrock and its fellow VAT-group fund management companies by a US company.
The services consisted of an investment management computer platform called "Aladdin", which provides portfolio managers with performance and risk analysis and monitoring to assist in making investment decisions, monitors regulatory compliance and enables implementation of decisions. These services are purely analytical, however, and are not intended as a substitute for a portfolio manager's expertise in making decisions. The services were described as ones which might otherwise be carried out by assistants to fund managers or might otherwise be purchased in.
It happens that most of the Blackrock VAT-group clients are non-SIFs, but Aladdin can support both types of funds.
Exemption issue
Following Abbey National, for the VAT exemption for the management of SIFs to apply it is necessary that:
"the services performed by a third-party manager in respect of the administrative management of the funds must, viewed broadly, form a distinct whole, fulfilling in effect the specific essential … elements of the management of special investment funds. Mere material or technical supplies, such as the making available of a system of information technology, are not covered by [the exemption]".
Other points arising from case law are that:
- the exemption is defined by the nature of the services provided and not according to the person supplying or receiving the services;
- it applies not only to investment management involving selection and disposal of assets under management but also to administration and accounting services;
- services within the exemption generally track those set out in the UCITS Directive, although this is not an exhaustive list; and
- in principle, it is fine to break the management of SIFs into a number of separate services.
The Tribunal was clear that the Aladdin services were "specific" to, and intrinsically connected with, the Blackrock group's businesses as fund managers. The services were also "essential" as they could not easily or practicably have been carried out manually, and they did not fall within the disqualification for systems of information technology, which prohibits exemption only for the supply of generic IT systems that are common to many businesses.
Finally, the Tribunal also considered that the Aladdin services met the requirement that they form a "distinct whole", being distinct from the activities carried on by the Blackrock companies. This conclusion was not affected by the fact that it was the Blackrock employees operating the platform.
Apportionment issue
The supply was accepted to be a single composite supply of services to the Blackrock VAT group as a whole which would, under normal Card Protection Plan principles, be subject to a single VAT rate – here, the standard rate. However, Blackrock argued that the supply should be split between the onward supplies to SIFs and those to non-SIFs so that the input tax relating to onward supplies to SIFs could be exempt.
While there is precedent allowing for multiple rates within a single composite supply (notably, the French Undertakers case), the circumstances where multiple rates can be used are extremely narrow and rely on there being clear authority in the legislation. The FTT here had no difficulty in stating that this supply should be taxed at a single standard rate.
Comment
With increasing numbers of bespoke IT systems for fund management, the guidance given by the Tribunal in Blackrock will be welcomed.
However, to obtain the benefits of the exemption, it is clear that the composite supply of fund management services needs to be to SIFs rather than predominantly non-SIFs. Fund managers making supplies to both types of funds will therefore need to consider whether it would be feasible to have entirely separate supplies to the various parts of the business. This is likely to be challenging, assuming that the funds will be investing in the same types of securities, but it will depend also on the services provided to the managers.
If you would like to view any other articles in the Tax newsletter October 2017 please click on the links below:
