Management of investments, portfolios, funds, ‘wrapper’ products and related services: meaning of ‘management’
The VAT exemption covers the management charge or fee which is normally deducted periodically from the assets in the special investment fund. For UK open-ended funds, the manager is required by regulation to be a separate entity - the authorised corporate director (ACD) of an Open Ended Investment Company (OEIC) or the operator (‘authorised fund manager’) of an Authorised Unit Trust (AUT). Offshore funds structured as SICAVs are, strictly, managed by their boards of directors. Contractual funds have a manager (operator) by constitution, because, like an AUTS, the fund is not a legal entity itself. In all cases, though, it is common for functions to be delegated by the manager/operator of the open-ended fund to specialist providers. Some closed-ended funds manage themselves, but it is common for the company to appoint a third party investment manager.
Following the judgment in Abbey National (C-169/04), it is clear that the term ‘management’ refers to the activities of administering the special investment fund as well as investment management activities. This is particularly relevant when considering the liability of services delegated by e.g. the ACD to a third party. In this case, investment management services provided by a third party (usually under a mandate) are also exempt as part and parcel of the management of the fund.
Similarly, if a third party is delegated to carry out a package of administrative services which overall has the distinct characteristic of a single supply of fund management services, this too will be exempt (see ECJ case GfBk below). However, some services will not have such a characteristic - for example, the services of a solicitor may be required to draft, or assist in drafting, legal documents which are essential to the operation of certain fund (e.g. a trust deed or prospectus). Such services have the characteristic of legal services and so cannot fall to be treated as fund management.
There is more potential for delegated administrative services to be seen as characteristic of fund management with open-ended funds than with closed-ended funds. This is because the activities which make up the administration of open-ended funds are more extensive and are prescribed in their regulation. Also, a key feature of open-ended funds is the requirement for regular valuations of the units, which requires inter alia knowledge of the number of units in issue. Services which consist of this are peculiar to and so characteristic of the management of the fund.
Since Abbey National, a further ECJ case, GfBk (C-275/11), considered the definition of “management” for the purposes of the exemption. The Court found that the provision of information and advice relating to the stock market, including the making of specific recommendations on the purchase and sale of assets, to a fund manager providing investment management services to special investment funds falls within the exemption on the basis that it constitutes an activity of “management”.
The Court stated that the fact that a third party’s advisory and information services do not alter the fund’s legal and financial position does not preclude those services from falling within the concept of “management” of a special investment fund provided they are closely related to the specific activity of an investment fund and are distinct in function and nature.
It pointed out that in Abbey National it had held that administrative and accounting services fell within that concept and thus, in GfBk, it was not important that it was the fund management company and not GfBk itself that implemented the recommendations to purchase and sell assets.
In light of this judgment, exemption applies to the services of making recommendations to fund managers to buy or sell assets where such services involve the constant monitoring of the fund’s assets and are intrinsically connected to the activity that is characteristic of an investment management company.
MIFID II Research
From 3rd January 2018, Markets in Financial Instruments Directive, (MiFID) II regulatory directive comes into force in the UK and defines research as:
“should be understood as covering research material or services concerning one or several financial instruments or other assets, or the issuers or potential issuers of financial instruments, or be closely related to a specific industry or market such that it informs views on financial instruments, assets or issuers within that sector. That type of material or services explicitly or implicitly recommends or suggests an investment strategy and provides a substantiated opinion as to the present or future value or price of such instruments or assets, or otherwise contains analysis and original insights and reach conclusions based on new or existing information that could be used to inform an investment strategy and be relevant and capable of adding value to the investment firm’s decisions on behalf of clients being charged for that research.”
The highlighted section of the definition shows that where MiFID II research is supplied to a fund manager it could be as part of an out-sourced fund management service and exempt if it forms the management of a SIF. Any separate supply of research that does not fall within this definition will be taxable.
Management of Pension Funds
The CJEU judgment in ATP Pension Services found that management and administration services that are integral (i.e. specific and essential) to the operation of a qualifying pension fund will fall within the exemption.
Exemption will only apply to charges made by third parties for services provided in connection with the management or administration of the contributions held in the pension fund itself. It will not apply to services provided in connection with any other funds in which the contributions paid into the pension funds may have been invested; although the management of such funds may qualify for exemption on the basis that the fund is a special investment fund in its own right (e.g. an Authorised Unit Trust). The fact that some or all of the costs of managing a fund in which a qualifying pension fund has invested is being charged onto a pension scheme, and therefore borne ultimately by the pension customers, will not bring services supplied in connection with non-qualifying investment funds within the fund management exemption
Management of Property Funds
In Fiscale Eenheid X the CJEU found that the fund management exemption does not cover the actual management of property held by a collective investment vehicle investing in retail estate. The exemption only applies to activities relating to the selection, purchase and sale of immovable property (i.e. investment management of the property assets) and any associated administration and accounting services.