Discretionary fund management not exempt from VAT

The European Court of Justice (ECJ) has surprised discretionary fund managers with an unexpected decision not to exempt DFMs from VAT.

In an opinion statement published yesterday, an advocate general at the ECJ has recommended all elements of discretionary management services, including initial charges, should be subject to VAT, backing HM Revenue & Customs’ recent clarification in VAT guidance.
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 March, and advocate general Eleanor Sharpston delivered her verdict yesterday.
She said that DFM should not be seen in terms of the different services provided, but should be considered as offering one single investment management service, which should all therefore be subject to VAT.

Her opinion statement will now be referred for a final decision from the ECJ. In the majority of cases, the court follows the guidance provided by the advocate general.

HMRC has previously stated that the Deutsche Bank decision could affect its VAT policy on DFM services. If the court agrees with the advocate general’s opinion, it could force HMRC to go further than its current position of exempting transactional fees on DFM services, and make the entire discretionary process subject to VAT.