Exempt management of SIFs and single supplies

A sophisticated portfolio management software platform provided to a fund manager fell, in principle, within the exemption for the management of SIFs, but the Upper Tribunal has referred to the ECJ the question whether an apportionment of the consideration is possible where the platform is used for the management of both SIFs and non-SIFs.

The Upper Tribunal has confirmed the conclusion of the FTT that supplies of an integrated trading portfolio management and risk reporting software application amounted to a supply of “management” for the purposes of the exemption for management of SIFs. However, the tribunal has referred to the ECJ the question whether the single supply rules prevent apportion of the consideration for such supplies between its use to manage SIFs and non-SIFs: BlackRock Investment Management (UK) Ltd v HMRC [2018] UKUT 415.

The decision of the Upper Tribunal, in which Simmons & Simmons represented the taxpayer, (and any eventual decision of the ECJ) will be important both in terms of the exemption and in understanding the limits of the single supply rule. The resounding confirmation by the Tribunal that the technology platform provided by Aladdin qualified as “management” is highly significant in a world where such technological solutions are becoming increasingly common and increasingly sophisticated. Equally, the question whether the correct interpretation of the exemption for management of SIFs can pre-empt the taxation of a single supply at a single rate by requiring an apportionment of the consideration is highly significant.

Background

BlackRock is the representative member of a VAT group that includes a number of fund management companies. In that capacity, BlackRock received supplies from BlackRock Financial Management (a US company) of services performed by and through a platform called Aladdin. Those supplies are used both in order to manage special investment funds (SIFs) and non-SIFs. However, it was agreed that the supply of the Aladdin platform was a single supply.

BlackRock contended that the supplies received fell within the exemption for the management of SIFs in Article 135.1(g) of the Principal VAT Directive and so it was not required to account for VAT on the receipt of those supplies under the reverse charge provisions. HMRC disagreed contending that the supplies were insufficiently distinct and complete to qualify as “management”. In the alternative, HMRC argued that since the supplies were predominantly used for the management of non-SIFs, the single supply did not fall within the scope of the exemption.

The FTT held that the supplies were “management” and as such qualified in principle for exemption. However, the FTT held that since there was a single supply of services, the consideration could not be apportioned between the use to manage SIFs and non-SIFs. Instead, since the majority of funds managed by BlackRock using the Aladdin platform were non-SIFs (both in terms of number and value), the single supply fell to be standard rated.

The exemption issue

The Upper Tribunal noted that the FTT had made extensive findings concerning the “sophistication and complexity” of the Aladdin services. The services were provided under the Aladdin Licence and Services Agreement and amounted to a combination of hardware, software and human input. The system combined aspects of portfolio analysis, trade modelling, compliance and risk modelling, corporate actions, trading execution and post-trade portfolio administration. Whilst Aladdin could model the effect of trades, the ultimate decision on whether to trade remained with the portfolio manager. Equally, with trade execution, the Aladdin software could provide information to the trading team but did not take over the whole dealer function.

The Upper Tribunal noted that the caselaw of the ECJ (and in particular the decisions in Abbey National and GfBk) have established clear principles on the scope of the exemption. Firstly, to fall within the meaning of the term “management of special investment funds, the services in question must form a distinct whole and be specific to, and essential for, the management of SIFs. Whilst, the term does not include mere physical or technical supplies, which lack the necessary specificity and distinctiveness, there is no requirement that the services cannot be provided by a third-party to whom the provision of such services has been outsourced. Also, the term “management” is not confined to cases where an operator undertakes the whole process or, as described in this case, the whole of the investment management cycle. “Separately identifiable services forming part only of that investment management cycle, and which have the necessary qualities of specificity and distinctiveness, are also encompassed within the term “management”. It is not necessary, for example, for the services in question to be, or to include, the selection, purchase or disposal of the assets under management.”

On the facts of this case, the Upper Tribunal was content that the FTT had reached the correct conclusion that the Aladdin services qualified as “management”. The services were sufficiently specific to fund management and were sufficiently distinct from the functions of the portfolio managers (there was no blurring of roles, which were essentially complementary). The Tribunal rejected HMRC’s contention that, in order to benefit from exemption, “significant aspects of management and administration have to be outsourced and that each of those aspects need to be sufficiently outsourced”.

The apportionment issue

The question here was whether the single supply of management “which would otherwise be wholly standard-rated, may be apportioned into exempt and taxable elements, based on use, so that the Aladdin Services are exempt to the extent that they are used in the management of the SIFs”.

The Tribunal noted that it was common ground that as a general principle a single supply should be taxed at a single rate. However, BlackRock argued that apportionment in this case would be relatively simple and would be consistent with the purpose of the exemption. The Tribunal recognised that the ECJ has held that a single supply must be taxed at a single rate even where it is possible to identify the price element of each element forming the full price (Stadion Amsterdam), however, considered that the principle could not be regarded as determining the scope of the exemption in this case. The issue in this appeal was “not so much concerned with whether different rates can be applied to separate elements of a single supply, but about the construction of Article 135.1(g) itself”.

The Tribunal took note, in particular, of the recent case of European Commission v Luxembourg concerning the scope of the cost sharing exemption. In that case, Luxembourg had argued that to make the cost sharing exemption practicable, it was acceptable to allow its use by members who did not solely carry on exempt activities, provided that their taxable activities did not exceed 30% of their annual turnover. The ECJ upheld the Commission’s complaint but in doing so indicated that the exemption was not limited to groups whose members are exclusively exempt and that where members also carried on taxable activities, it was appropriate to allow an apportionment of supplies between those used for exempt activities and those not so used. The Tribunal accepted that, although the case did not refer to the effect of the single supply rules on this situation, the wording of the ECJ was suggestive of allowing an apportionment of a single supply and thereby essentially bifurcating a single supply.

The Luxembourg decision was enough to give the Upper Tribunal “pause for thought” and make it at least “open for argument that such apportionment would be capable of applying to other exemptions, especially those that depend, at least to an extent, on the use to which that particular supply of services is put”. In the same way that the cost sharing exemption was not confined to persons who carry on a wholly exempt activity, the exemption in Article 135.1(g) is not confined to the provision of management to recipients who manage only SIFs. On that basis, the Upper Tribunal accepted that it was arguable that the exemption in Article 135.1(g) should be construed as allowing a use based apportionment and that in consequence a single supply might be bifurcated into two elements, one exempt and one taxable. However, as the Tribunal did not feel able to determine the issue with complete confidence, it was appropriate to refer the matter to the ECJ. In doing so, the Tribunal rejected HMRC’s proposal that if a reference was being made in connection with the apportionment issue, it was also appropriate also to refer the exemption issue, since BlackRock had to succeed on both points in order to secure repayment of its claims. As noted above, the Tribunal considered that the existing ECJ case law, in particular Abbey National and GfBk, was sufficiently clear to allow it to decide the exemption issue, as indeed the FTT had been able to do at first instance.

Comment

The decision of the Upper Tribunal to confirm that that the services provided under the Aladdin platform amounted to “management” is highly significant. The use of technological solutions for complex management functions is increasingly common and the recognition that such functionality goes beyond the merely technical to the heart of the management function is important.

Equally, the decision to refer the single supply question to the ECJ may prove equally significant. This is a case in which the correct determination of the liability of a supply depends on the use to which it is put - which raises the question where it is put to a number of uses which affect that liability, do you apportion or apply an approach based on the main or predominant use? Despite the lack of any express language in the exemption indicating that it should be exempt “to the extent that” or similar, there appear to be strong arguments based on the purpose of the exemption and the principle of fiscal neutrality to suggest that such an approach to the exemption would be consistent with its objective. In such a case, the interpretation of the exemption may well pre-empt the normal single supply analysis.

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