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European Court of Justice says entire DFM service is VAT-able

The European Court of Justice has recommended all elements of discretionary management services, including dealing fees and commission, should be subject to VAT, which could see HM Revenue & Customs reassess its VAT treatment of DFM services.

The opinion statement from the ECJ, published today, has gone against the expected outcome which predicted all discretionary fund management services would be exempt from VAT.

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 advocate general Eleanor Sharpston delivered her verdict today.

She said that DFM should not be split in terms whether there is a transactional element, such as dealing fees, but should be considered as offering one single investment management service, which should all therefore be subject to VAT.

In the opinion statement advocate general Sharpston says: “In the light of all the above considerations, I am of the opinion that the Court should answer the Bundesfinanzhof’s questions to the following effect: that portfolio management services of the kind at issue in the main proceedings form a single supply for VAT purposes.

“Such services do not fall within the exemption provided for on the common system of value added tax.”

Today’s opinion statement will now be referred back to the original German court for a decision and a final decision from the ECJ. In most cases, courts will follow the guidance set out by the advocate general.

HMRC has previously said the Deutsche Bank decision could inform its VAT policy on DFM services.

If made final, the opinion statement could force HMRC to go further than its current position of exempting transactional fees on DFM services, and making the entire discretionary process subject to VAT.

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. Most surprising and counter to common sense given that at the heart of every DFM service, and the sole purpose of its existence, is a series of financial transactions (investment dealing) which is an exempt service! But with governments across Europe extremely strapped for cash – they’ll get it any way they can!

  2. I wonder if this will mean that Dublin based offshore bonds will need to start paying VAT on Discretionary Fund Managers because of this ruling?

  3. Oh dear. Looks like an increase in DFM costs is around the corner. IFAs who outsource will need to give serious thought to whether these additional costs will outweigh the benefits of discretionary services. Will the additional costs mean greater scrutuny by the FSA, even though the costs purely relate to tax? Or will this mean a reduction in DFM charges across the board so that their services become more competitive when taking account of the VAT increase? Answers on a postcard…….

  4. Tony Greenman 9th May 2012 at 10:04 am

    Like Dave, I’m being asked whether this case could impact on teh differential UK/Ireland VAT treatment of DFM services supplied to providers of offshore bonds. My understanding has always been that in Ireland (but not UK) such bond products are regarded as recognised collective investment schemes and so management services provided to them (whether by a DFM or other manager i.e. not merely investment management) are VAT exempt there. The Deutsche Bank case is not about that ‘leg’ of the exemption, it is about whether a DFM service amounts to the effecting of underlying financial transactions (like a stockbroker) or the provision of ‘management, advice and expertise’. So I’d be very grateful for someone to say I’m wrong, but I don’t think the case will impact the treatment of DFM services to offshore bond providers.

  5. That’s right Tony.
    The other thing worth bearing in mind is that this is just at the Advocate General stage – the full Court judgement in the Deutsche case is due later in the year.

  6. Not quite sure on the point of the ruling – Deutsche will simply split the activities with transaction executed by a separate broking subsidiary and get round it that way. Additional cost & admin, Court objective not achieved.

    The only ones to be caught will be DFM’s too small to hive off transactions.

    Would have been more fun to have seen a comment on the frequency of trading within DFMs…

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