In BlackRock Investment Management v HMRC [2018] UKUT 415 (20 December 2018), the Upper Tribunal (UT) found that financial technology services provided to portfolio managers could ‘in principle’ benefit from the exemption contained in the Principal VAT Directive article 135.1(g), which applies to the management of special investment funds (SIFs), but the tribunal would not conclude on the question of whether an apportionment is possible between SIFs and non-SIFs.
BlackRock is the representative member of a VAT group that includes a number of fund management companies. It therefore manages a range of collective investment schemes, only some of which qualify as SIFs. BlackRock’s portfolio managers receive services, performed by and through a platform known as Aladdin. These services consist of performance and risk analysis to assist in the making of investment decisions, as well as the monitoring of regulatory compliance in order to enable portfolio managers to implement trading decisions. They are a combination of hardware, software and human input. Aladdin’s functions span the whole of the investment cycle and portfolio managers use its services to manage both SIFs and non-SIFs.
The issue was whether BlackRock was required to account for VAT under the reverse charge mechanism on the supply of Aladdin Services to it by BlackRock US. BlackRock contended that Aladdin Services were exempt from VAT under the Principal VAT Directive art 135.1(g), in so far as those services were used in the management of SIFs. This raised two questions: whether Aladdin Services amounted to fund management and therefore fell within the exemption; and, if so, whether the consideration paid by BlackRock could be apportioned between SIFs and non-SIFs.
Applying Abbey National (Case C-169/04) and GfBk (Case C-275/11), the UT accepted the FTT’s findings that the respective roles and functions of Aladdin and BlackRock were essentially complementary, but that they were distinct from each other as there was no blurring of roles. The UT also observed that Aladdin Services were intrinsically connected to the activities characteristic of an investment fund and that they were specific and essential to the management of a SIF. Finally, it rejected HMRC’s contention that, in order to benefit from the exemption in art 135.1(g), significant aspects of management and administration have to be outsourced. Aladdin Services were therefore ‘in principle’ capable of being exempted management services so that the apportionment issue arose.
Given that it was accepted that the supply was a single supply of services received by BlackRock, the question was whether (applying Talacre (Case C-251/05) and French Undertakers (Case C-94/09)) different rates could be applied to the various elements of that single supply. This, in turn, depended on the construction of art 135.1(g) and on whether it required such an apportionment. In this respect, the UT noted that the purpose of art 135.1(g) is to ensure fiscal neutrality between collective investments and direct investment and that there is nothing in its wording that precludes apportionment. The position could therefore be argued either way.
Why it matters: Having been unable to reach a conclusion on the apportionment issue, the UT decided to refer the case to the CJEU for a preliminary ruling. So, contrary to what some may have thought following the CJEU’s decision in Stadion Amsterdam (Case C-463/16), the issue of the application of different rates to a single supply remains unsettled. This case is also an interesting example of the application of VAT to a ‘fintech’ platform of such ‘sophistication and complexity’ that it was ‘difficult to convey in words’.
In BlackRock Investment Management v HMRC [2018] UKUT 415 (20 December 2018), the Upper Tribunal (UT) found that financial technology services provided to portfolio managers could ‘in principle’ benefit from the exemption contained in the Principal VAT Directive article 135.1(g), which applies to the management of special investment funds (SIFs), but the tribunal would not conclude on the question of whether an apportionment is possible between SIFs and non-SIFs.
BlackRock is the representative member of a VAT group that includes a number of fund management companies. It therefore manages a range of collective investment schemes, only some of which qualify as SIFs. BlackRock’s portfolio managers receive services, performed by and through a platform known as Aladdin. These services consist of performance and risk analysis to assist in the making of investment decisions, as well as the monitoring of regulatory compliance in order to enable portfolio managers to implement trading decisions. They are a combination of hardware, software and human input. Aladdin’s functions span the whole of the investment cycle and portfolio managers use its services to manage both SIFs and non-SIFs.
The issue was whether BlackRock was required to account for VAT under the reverse charge mechanism on the supply of Aladdin Services to it by BlackRock US. BlackRock contended that Aladdin Services were exempt from VAT under the Principal VAT Directive art 135.1(g), in so far as those services were used in the management of SIFs. This raised two questions: whether Aladdin Services amounted to fund management and therefore fell within the exemption; and, if so, whether the consideration paid by BlackRock could be apportioned between SIFs and non-SIFs.
Applying Abbey National (Case C-169/04) and GfBk (Case C-275/11), the UT accepted the FTT’s findings that the respective roles and functions of Aladdin and BlackRock were essentially complementary, but that they were distinct from each other as there was no blurring of roles. The UT also observed that Aladdin Services were intrinsically connected to the activities characteristic of an investment fund and that they were specific and essential to the management of a SIF. Finally, it rejected HMRC’s contention that, in order to benefit from the exemption in art 135.1(g), significant aspects of management and administration have to be outsourced. Aladdin Services were therefore ‘in principle’ capable of being exempted management services so that the apportionment issue arose.
Given that it was accepted that the supply was a single supply of services received by BlackRock, the question was whether (applying Talacre (Case C-251/05) and French Undertakers (Case C-94/09)) different rates could be applied to the various elements of that single supply. This, in turn, depended on the construction of art 135.1(g) and on whether it required such an apportionment. In this respect, the UT noted that the purpose of art 135.1(g) is to ensure fiscal neutrality between collective investments and direct investment and that there is nothing in its wording that precludes apportionment. The position could therefore be argued either way.
Why it matters: Having been unable to reach a conclusion on the apportionment issue, the UT decided to refer the case to the CJEU for a preliminary ruling. So, contrary to what some may have thought following the CJEU’s decision in Stadion Amsterdam (Case C-463/16), the issue of the application of different rates to a single supply remains unsettled. This case is also an interesting example of the application of VAT to a ‘fintech’ platform of such ‘sophistication and complexity’ that it was ‘difficult to convey in words’.
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