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HMRC excludes transactional discretionary fees from VAT

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HMRC has confirmed that transactional fees for discretionary management services will not need to include VAT, following last year’s landmark European Court of Justice judgment.

The case involved Deutsche Bank’s discretionary services and whether VAT should be charged for ongoing services and on annual management fees.

The European Court of Justice recommended all elements of discretionary management services, including dealing fees and commission, should be subject to VAT, leading HMRC to state it would issue new guidance on the matter. 

The judgment means portfolio management services with an annual or periodic management fee must pay VAT.

But HMRC has today confirmed that an exemption will apply to some services, such as fees charged strictly on a transaction by transaction basis when the manager has no direct link to the execution of the transaction.

The change will come into force on 1 December this year.

HMRC states: “As a result of the judgment, it is clear that fees charged by portfolio managers on an annual or other periodic basis for the purchase and sale of securities can no longer be treated as exempt from VAT, regardless of whether or not a separate charge is made.

“However, the ECJ in Deutsche Bank only considered the VAT position of periodic fees charged on a flat fee basis where there was no direct link to the transactions being executed. Where, therefore, fees are charged strictly on a transaction by transaction basis (that is, per purchase or sale of investments) exemption will continue to apply.”

HMRC says portfolio management services differ from other financial advisory services because there is an ongoing commitment to monitor and manage an individual client’s investment portfolio to formulate investment decisions or recommendations.

It says portfolio services should also be distinguished from investment fund management services where VAT exemption is dependent upon the nature of the fund being managed.

Advisers had been left confused about the “grey area” of whether they should charge VAT for ongoing services.  

However, HMRC confirmed last October that ongoing advice services would be exempt of VAT, as long as periodic reviews were agreed at outset.

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