The Court of Justice of the European Union (the Court) has ruled in BlackRock Investment Management (UK) Ltd (Case C-231/19) that a "single supply" of management services delivered by a technology services platform for the benefit of a fund manager supplying both special investment funds and other funds could not benefit from the VAT investment management exemption within the EU's Principal VAT Directive (the Directive).
BlackRock Investment Management (UK) Ltd (BlackRock) is a member of the BlackRock UK VAT group, which includes several companies providing services as fund managers. The case before the Court considered a number of funds under management by BlackRock. Those funds were predominantly non-special investment funds (non-SIFs), with a smaller number of special investment funds (SIFs) also being managed.
In the course of fund management, BlackRock received the services of BlackRock Financial Management Inc., operating in the United States through an IT platform called "Aladdin." The Aladdin services included a wide range of investment services encompassing the entire investment cycle, including performance and risk analysis, monitoring of regulatory compliance, and the provision of assistance to portfolio managers. BlackRock considered that the Aladdin services used in the management of the SIFs were exempt from VAT. BlackRock accounted for VAT only on the Aladdin services relating to the non-SIFs. The split of VAT accounted to the UK tax authorities accorded to the pro-rata proportion of total funds under management, referable to the SIFs and the non-SIFs.
From a legislative perspective, Article 135(1)(g) of the Directive requires European Union Member States to exempt "the management of special investment funds as defined by Member States." Article 135(1)(g) has been implemented in the UK's Value Added Tax Act 1994 (VATA). Section 31 VATA provides that supplies of goods or services of a description specified in Schedule 9 VATA are VAT-exempt and, in turn, items 9 and 10 of Group 5 of Schedule 9 VATA set out that the management of SIFs is a VAT-exempt supply.
What the Court Decided
The question referred to the Court was whether the Aladdin services were exempt under Article 135(1)(g) of the Directive. Furthermore, the Court was required to decide, if the Aladdin services were exempt, whether the consideration for a "single supply" of the Aladdin services should be apportioned where those services had been used for the management of both SIFs and non-SIFs.
The Court noted that the Aladdin supplies needed to be viewed "as forming a single indivisible economic supply," accepting the factual identification of the Aladdin services made by the UK taxation tribunals. Attempts to distinguish between different elements of the Aladdin services were, according to the Court, not required in a VAT context.
Having identified the supply as being a single supply, the Court held that such a supply would need to be subject to a single VAT treatment at a single VAT rate. While BlackRock argued, following Commission v Luxembourg (C-274/15), that a single supply did not prevent different VAT treatments based on the different uses made of such a supply, the Court was not persuaded. The Court distinguished Commission v Luxembourg as being a case dealing with the cost-sharing exemption from VAT, where the legal wording of the Directive expressly facilitated a difference in VAT treatment. By contrast, Article 135(1)(g) contained no facilitating language to permit a differentiated treatment; the legal provisions in Article 135(1)(g) applied only to the nature of the supply, and did not focus on the use being made of that supply or the characteristics of the recipient of the supply.
Accordingly, the VAT treatment of the supply was identified by the Court as being the nature of the Aladdin services supplied, rather than the identification of whether the majority of the BlackRock managed funds benefiting from the Aladdin services were SIFs or non-SIFs. The nature, and taxation characteristics, of the supplier or recipient of such supplies was not the critical element to be considered, according to the Court.
For the Aladdin services to have been treated as being fully VAT-exempt, the Aladdin services would have needed to "form a distinct whole fulfilling in effect the specific, essential functions of the management of SIFs." This was, as a matter of fact, not what was happening – the Aladdin services were not specific to the essential functions of the management of the SIFs looked at in isolation. The Aladdin services were utilised by both SIFs and non-SIFs generally, and therefore did not fall within the scope of Article 135(1)(g).
Points to Consider
Following the decision, investment managers will need to take great care in providing single supplies across a range of recipients, only some of which may be SIFs which are able to benefit from the VAT exemption for investment management services in Article 135(1)(g).
The BlackRock case focused on the nature of the supply and how that supply is used – rather than the recipient of the supply. As a result, investment managers may need to consider developing or amplifying systems that separate services relating to SIFs and VAT-exempt activities on the one hand, from services relating to non-SIFs and VATable activities on the other. Services related to a SIF will need to be "distinct," and will need to satisfy the "specific, essential functions of the management of SIFs," in order for the VAT exemption in Article 135(1)(g), and items 9 and 10 of Group 5 of Schedule 9 VATA, to be obtained. Many investment managers are unlikely to have differentiated supplies to SIFs and non-SIFs in this manner before BlackRock, and some restructuring may now be necessary.
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