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HMRC excludes transactional discretionary fees from VAT


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

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

But HMRC has confirmed 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.

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.

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

Apcims chief executive  Tim May says: “This welcome clarification means private investors no longer face the rise in costs we had feared. The tax authorities have arrived at a sensible and well thought-out resolution to a European Court ruling which could have had serious consequences to UK wealth management firms and their clients.”

Chadwicks chartered financial planner Richard Ross says: “As the largest part of a discretionary fund manager’s charge tends to be a fixed percentage of the investment rather than transaction-specific fees, this judgment creates a further cost to clients. This will make the decision to outsource investment management more finely balanced.”


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