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BlackRock Investment Management v HMRC

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In BlackRock Investment Management v HMRC [2017] UKFTT 633 (15 August 2017), the FTT found that although the services supplied were exempt to the extent that they related to special investment funds (SIFs), it was not possible to apportion the consideration between services used for SIFs and those used for non-SIFs, so that the entire single supply was standard rated.

BlackRock was the UK representative member of a UK VAT group that included two other fund management companies. BlackRock received services from BFMI, a US affiliated company which consisted in an investment management computer platform called ‘Aladdin’. Aladdin provided portfolio managers with performance and risk analysis to assist them in making investment decisions, monitored regulatory compliance, and enabled the implementation of trading decisions.

The first issue was whether BlackRock needed to account for VAT under the reverse charge mechanism on supplies of services by BFMI. BlackRock’s case was that the services supplied by BFMI were exempt under VATA 1994 Sch 9 Group 5 item 9, insofar as those services were used by the recipients in the management of SIFs. The exemption contained in Principal VAT Directive Art 135.1(g) applies to services which constitute the ‘management of special investment funds’; and SIFs are investment funds which are aimed at small investors.

In addition, BlackRock contended that Aladdin services constituted a single supply made by BFMI to BlackRock as a representative VAT group member. If the services supplied by BFMI, and reverse charged by BlackRock, were exempt insofar as they were used for the purposes of SIFs, because they formed part of a single supply which was predominantly used for the management of non-SIFs (which would be standard rated), the second issue was whether the single supply could be taxed at different rates and the consideration apportioned.

In relation to the first issue and referring to Abbey National (Case C-169/04) and GfBk (Case C-275/11), the FTT noted that the key test was whether the services supplied by BFMI to BlackRock formed a distinct whole, and were specific to, and essential for, the management of SIFs. The FTT found that Aladdin services had been specifically designed and supplied for the purposes of fund management; they were ‘intrinsically connected’ to the recipients’ businesses and therefore essential to portfolio managers.

The FTT also found that the Aladdin services formed a ‘distinct whole’; they provided a sophisticated analytical and monitoring information service, giving access to the extensive data banks stored on BFMI’s servers, which covered the full range of the investment management cycle. Furthermore, there was no blurring of functions; Aladdin supplied information and portfolio managers made the decisions.

As to the second issue, the FTT found that BFMI made a single supply and it was not permissible to apportion the consideration between the use of the Aladdin Services for SIFs and non-SIFs. French Undertakers (Case C-94/09) and Talacre (Case C-251/05) could not apply in this case, as there was no authority in EU law to treat parts of BFMI’s supply differently.

The FTT concluded that although, ‘viewed in isolation’, BFMI’s supplies to BlackRock qualified for the exemption under Art 135.1(g) to the extent that they were used for the management of SIFs, the supplies were subject to the reverse charge at the standard rate because no use-based apportionment of the consideration was permitted in this case.

Read the decision.

Why it matters: In HMRC’s view, in order to fall within the Art 135.1(g) exemption, the third party had to take on a ‘significant part of the core functions’ of the manager. HMRC had therefore argued that there had been no outsourcing of the management of the SIFs by BlackRock, so that the exemption did not apply. The FTT found, however, that this view was not supported by case law, in particular Abbey National.

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