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HMRC internal manual

VAT Partial Exemption Guidance

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HM Revenue & Customs
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Guidance for specific trade sectors: finance: stockbrokers: attribution of input tax on research expenses

Stockbrokers act as intermediaries in the purchase and sale of shares, and will also provide advice on investment strategies to their clients.

They will normally have a research department that analyses company information and uses the results of that analysis both for their own purposes and to advise its clients. This information is made available to customers partly by e-mails, telephone calls and through the Internet. Many stockbrokers also provide their clients with hardcopy circulars and reports.

Any payments made by clients for research services will be consideration for a taxable supply of research. However, the research is also partly funded through the brokerage fees. HMRC therefore regard the payments as being consideration for both the brokerage services and research services. Following the approach taken by the ECJ in Card Protection Plan C-349/96, the research element of the brokerage fee is seen as ancillary to the exempt brokerage

There has recently been some clarification in the regulatory requirements issued by the Financial Services Agency (FSA) regarding commission charged to brokers. With effect from 1 January 2006, commission charges can only relate to the execution of deals and associated research. If brokers do not provide a break down of their commissions, investment managers will have to estimate the split between these two elements. The introduction of these new rules will not affect the VAT liability of brokerage services. Where research is provided under a contract for arranging a transaction in securities, it will continue to be seen as ancillary to the exempt brokerage charge. This means that the whole supply will be treated as exempt.

However, we will continue to accept that the provision of literature to potential clients can be deemed supplies of goods under VATA 1994 Schedule 4 paragraph 5(1) provided the total cost is less than £50 over the relevant year.

Impact on PE methods

A substantial number of taxpayers’ special methods attempt to identify the proportion of taxed residual expenditure that is used for investment research purposes. This is usually done by reference to a headcount or some other agreed calculation. However, in then attributing input tax incurred on such expenditure to taxable and exempt supplies the test has been to consider how the research documents (which have, in some instances, wrongly taken to have been wholly, or mainly, zero rated) are used. This is, in our view, the wrong test. Rather, it is a matter of ascertaining how the research is used by the organisation as a whole.

The research can be disseminated to clients by various means (see PE66050 - Background - the history of Lennartz and its interaction with PE) through morning notes issued or in meetings, as well as being used internally and in connection with brokerage services. As a result, HMRC does not consider that the costs of research are predominantly used for the production of zero-rated literature.

In the Forexia (LON/98/879) case, the Tribunal found that the publication and distribution of regular news digests containing financial information communicated to clients electronically was not a supply of goods. This was because there was no provision of goods to the customer. As a result, the supply was one of services taxable at the standard rate. Similarly there is no deemed supply of goods when information circulars are provided in conjunction with brokerage services.

Where the expenditure is not used exclusively for specific taxed outputs, it could be seen as having a direct and immediate link to the whole of the business. However, if the business has a sectorised PE method, it will probably be more appropriate to link the expenditure to specific sectors. This follows the same sort of approach as taken by the ECJ in the Abbey National case [C-408/98].