Tax & Trusts News

VAT to be charged on Discretionary Management

17-November-2012 8:02
in General
by Admin

So,  with the European Court of Justice (ECJ) declaring discretionary services should be subject to VAT. Many will be effected by this, if it becomes legislation. Those effected with be anyone receiving discretionary management services, such as, through a Stock Broker, Discretionary Fund Manager, etc.

This announcement was in response to a question by the German high courts about Deutsche Bank’s VAT treatment of its discretionary services. The ECJ recommended all elements of Deutsche’s discretionary services – including initial charges – should be subject to VAT, backing a clarification by HMRC earlier this year.


HMRC have clarified "Discretionary investment management is a service provided by an investment manager to a client in which the client authorises the investment manager to act in respect of his/her relevant funds to use his/her discretion to invest those funds to achieve the best result for the client in relation to the level of risk to which the client wishes to expose their capital. Once authorised the investment manager invests those funds and makes all the decisions in relation to the pooling and investment of the capital.


Discretionary investment management services are currently taxable in the UK...so all the charges made by the manager for his management services to the client carry VAT at the standard rate; these include any charges described as:


  • Initial charges
  • Annual management charges
  • Performance charges."


If this is the final outcome, there may be legal implications for the UK afterwards; and in this instance, the ECJ statement was “in-line” with the European Union’s taxation rules. On 29 February 2012, the HMRC issued guidance on fees and VAT preventing discretionary fund managers from NOT paying VAT in this manner. This is due to come into force in 2013 alongside the FSA’s RDR overhaul of financial advice.

Stock Broking and Discretionary Fund Management companies offer only a single packaged proposal and as such this is settled case-law that i.e. where a transaction comprises a bundle of elements, regard must be had to all the circumstances in order to determine whether there are two or more distinct supplies or one single supply.

Moreover, in certain circumstances, several formally distinct services which could be supplied separately must be considered to be a single transaction when they are not independent.

The advocate general concluded that the portfolio management services of the kind at issue “form a single supply for VAT purposes” and as such, these services do not fall within the exemption provided for on the common system of value added tax.

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