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Software tool could benefit from VAT fund management exemption

A software tool used in the fund management process could qualify for an exemption from VAT for management of special investment funds (SIFs) the Upper Tribunal has confirmed, upholding a decision of the First–tier Tribunal (FTT) concerning fund manager BlackRock.10 Jan 2019

However, the Upper Tribunal referred to the Court of Justice of the European Union (CJEU) the question of whether the supply of the tool could be apportioned where it was used partly for exempt and partly for taxable purposes.

"Although the Upper Tribunal has found for BlackRock on the exemption issue, this finding will only be of any use to BlackRock if the CJEU finds that the supply can be apportioned between taxable and exempt activities," said Maryse Heijnen a VAT expert at Pinsent Masons, the law firm behind Out-Law.com.

The UK group of BlackRock was using a software tool called 'Aladdin' supplied to it by a US company in the BlackRock group. Aladdin provides the portfolio managers with performance and risk analysis and monitoring to assist in the making of investment decisions, monitors regulatory compliance and enables the portfolio managers to implement trading decisions.

The UK's HM Revenue & Customs (HMRC) argued that the Aladdin services were subject to VAT and therefore Blackrock should be paying VAT under the reverse charge mechanism on the supplies received.

BlackRock argued that the Aladdin supplies were exempt from VAT in so far as they were used in the management of SIFs, because there is an exemption from VAT for the management of SIFs.

BlackRock manages a range of funds for varying classes of investor. For VAT purposes some of these funds enjoy SIF status and so the management of them is exempt from VAT. SIFs are investment funds which, broadly speaking, are aimed at small investors. Other funds do not have SIF status and management services supplied to them are subject to VAT.

HMRC argued that the exemption for management of SIFs only applies where all or substantially all of a particular function of fund management is outsourced, and that the Aladdin Services do not satisfy this requirement because no particular function is outsourced.

The Upper Tribunal said that it was clear from CJEU case law that for the exemption to apply "the services in question must form a distinct whole and be specific to, and essential for, the management of SIFs".

"We consider that the findings of the FTT, first, that the Aladdin Services, taken as a whole, had an inner coherence relative to fund management and, secondly, that there was no 'blurring' of those services with activities of BlackRock which could cause those services to lose their distinctive character is decisive of the question whether those services formed a distinct whole," the Upper tribunal said in its judgment.

The judges said that on the evidence the FTT was entitled to make findings that the Aladdin Services were intrinsically connected to the activities characteristic of an investment fund and that they were specific and essential to the management of a SIF. They did not accept HMRC's argument that for the exemption to apply significant aspects of management and administration have to be outsourced and that each of those aspects needed to be sufficiently outsourced.

Blackrock accepted that the Aladdin services were a single composite supply, but had argued that it should be possible to apportion the fee such that VAT was due on the non SIF element and exemption applied to the SIF element. The FTT held that the general principle was that a single rate should apply to a single supply except in very specific circumstances, none of which applied in this case. Therefore, as non-SIF funds predominated the FTT said the entirety of the supply fell to be standard rated.

The Upper Tribunal said it could not "with complete confidence determine the Apportionment Issue" and so would refer the question to the CJEU, although it declined to also refer the question about the exemption.

"We therefore conclude that it is arguable that Article 135.1(g), properly construed, permits an apportionment of the consideration for a single supply of management services as between the use of those services for the management of SIFs and non-SIFs respectively, and that in consequence that single supply will effectively be bifurcated into two elements, one exempt and one taxable. It is, however, equally arguable that such an apportionment cannot apply, and that the single supply should be taxed according to its predominant or principal use, whether that is use in the management of SIFs or non-SIFs," the judges said.

"The proposed referral to the CJEU raises an interesting VAT technical question as to whether it is possible to only apply VAT to that part of a single composite supply that relates to the management of non-SIFs," said Maryse Heijnen.

"Given the issues raised by the Upper Tribunal's proposed referral, the future course of this litigation should be closely monitored," she said.