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Europe ruling expected to recommend exempting DFMs from VAT

An upcoming opinion statement from the European Court of Justice is expected to recommend discretionary management services should be exempt from VAT, which would lower fees for investors but could push up costs for DFM providers.

Under the VAT Act 1994, discretionary services are subject to VAT but dealing fees and commission involved in discretionary services are exempt.

Last year, a German court questioned Deutsche Bank’s VAT treatment of its discretionary services and referred the case to the ECJ for guidance.

The case was heard in the ECJ on March 1 and an opinion statement from advocate general Sharpston is expected on May 8. It will then be referred back to the original German court for a decision. In most cases, courts will follow the guidance set out by the advocate general. In January, HM Revenue & Customs said the Deutsche Bank decision could inform its VAT policy on discretionary investment services.

Grant Thornton UK director of indirect taxes Stuart Brodie says the expectation is that all discretionary investment management will become exempt. He says the end-investor would benefit from cheaper fees, but DFM providers would no longer be able to recover VAT on their business costs.

Providers may face additional costs if a client asks for a refund on the VAT they have paid. Investors can retrospectively claim back incorrectly paid VAT from firms up to six years before the rules changed but businesses can only reclaim VAT from HMRC to refund investors for up to four years, after which time the business has to cover the cost of the refund.

Brodie says: “It would be a total game-changer from the HMRC’s current position. It would mean everybody involved in the industry would have to revisit the VAT liabilities they are applying.”

Bloomsbury Financial Planning partner Jason Butler says: “An exemption would bring the treatment of discretionary services into line with other funds.”

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