Management of investments, portfolios, funds, 'wrapper' products and related services: discretionary investment management services
Portfolio management services that do not fall into the exemption for the management of special investment funds (SIFs) are taxable supplies. VAT is therefore due on the services of managers (sometimes referred to as ‘wealth’ or ‘private client’ managers) who manage the investment portfolios of individual clients.
Portfolio management services involve an ongoing commitment to monitor and manage an individual client’s investment portfolio to formulate investment decisions or recommendations. This is what distinguishes them from the advised sales services outlined in VATFIN7665. They should also be distinguished from investment fund management services (that is, the management of pooled investments within a fund structure) where VAT exemption is dependent upon the nature of the fund being managed. More information on the fund management exemption can be found in VATFIN5100 to 5350.
Portfolio management can be provided on either a discretionary or advisory basis. If a manager contracts to act on a discretionary basis the client authorises the manager to invest funds on his or her behalf as the manager sees fit (although limited by pre-agreed parameters relating to the level of risk exposure and, in some instances, the nature of the products invested in). When contracted on an advisory basis, however, the manager must refer back to the client before any investment transactions are undertaken.
In both instances, 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.
Dealing fees/commissions that are charged strictly on a transaction by transaction basis (that is per purchase or sale of investments) specifically for the services of executing trades in exempt securities and valued accordingly, are VAT exempt. This is conditional upon the portfolio management services being contracted for on that basis and the charges for the transaction being directly linked to the sale and purchase of an investment product and separately identified in any VAT invoice as such.
Where a manager does not supply trade execution services on the basis outlined above and makes charges for the combined activities of managing a client’s portfolio and executing exempt trades, those charges are liable to VAT at the standard rate. This applies even when the transaction charges are separately identified to the customer. This VAT treatment was confirmed by the ECJ in the German Deutsche Bank case (ref C-44/11).
Deutsche Bank provided discretionary portfolio management services to individual investors which consisted of two elements:
- the activity of analysing and monitoring the assets owned by the investors in accordance with a strategy agreed with them, and
- the consequential activity of actually purchasing and selling financial securities on their behalf.
The investors paid a single annual portfolio management fee which included a separately identified charge for buying and selling securities. The issue before the Court was whether this charge constituted consideration for a separate exempt supply.
The ECJ decided that in these circumstances the two elements were parts of a single service and, as those elements were of equal weight and together formed a single supply of taxable portfolio management services, the entire fee was subject to VAT at the standard rate.