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Rethinking research: MiFID II and VAT

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If you work in the financial services industry, you’ll have heard of the second Markets in Financial Instruments Directive – but you may know it better as MiFID II. After a long development period, this new legislation was introduced for all EU member states in January of this year.
MiFID II’s central aim is to increase investor protection and transparency within the fund management industry. By necessity, this route to simplicity is a complex one. With over a million paragraphs of rules, MiFID II’s influence is extensive. Among the affected areas is the research used by fund managers to make investment decisions.
VAT liability: As a consequence of the introduction of MiFID II, research now needs to be ‘unbundled’ from execution. In its revised internal manuals, HMRC now sees the supply of most research as being subject to VAT at the standard rate.
Most research is supplied to fund managers, even if the cost is ultimately borne by the underlying fund or customer (e.g. via a research payment account). It therefore seems likely that many research providers will need to issue VAT invoices to UK fund managers. To the extent that fund managers are located outside the UK, no UK VAT would need to be charged on invoices, although the overseas fund manager is likely to have to self-account for VAT under the reverse charge rules.
It also seems likely that the majority of UK fund managers who are involved in the management of professional (i.e. non-retail) funds are VAT registered and should be able to recover VAT incurred on their cost base. This is because research often forms a cost component of discretionary fund management services they provide to funds. Such services are treated as subject to VAT.
In many cases, the introduction of VAT to research should not result in any additional cost to many fund managers as they would be able to recover the VAT they are charged. Where funds or other businesses purchase the research directly, this could increase the cost.
In the event that a fund manager provides services to a special investment fund (SIF) – normally funds marketed to retail customers such as authorised unit trusts, OEICs, investment trusts, etc. – the fund management services are exempt from VAT. This means that the manager cannot recover VAT on costs directly relating to such fund management services. Where MiFID II research is supplied to such a fund manager, HMRC accepts that such research could be seen as part of an outsourced fund management service and exempt if it forms the management of a SIF.
Funding a way forward: Assuming that most research will be subject to VAT, it is necessary to review research agreements to ensure that research providers are able to charge VAT in addition to the charge for research. Some research agreements have been drafted with VAT inclusive clauses which mean that VAT cannot be charged in addition to the research costs. These may need to be renegotiated so that the charges are exclusive of VAT. As detailed above, the fund managers should be able to recover the VAT.
Overseas research provider: If you’re a UK fund manager who receives taxable research from a non-UK research provider, you are obliged to self-account UK VAT under the reverse charge rules. Depending on the VAT recovery position of the fund manager, this VAT would be recoverable in full.
The ultimate cost of the research for the fund manager should remain the same whether supplied by a UK or non-UK entity. But from a presentational perspective, it may prove easier to provide it from a non-UK entity, as it shifts the VAT reporting obligation to the customer.
Enhanced VAT recovery for research providers: A potential positive consequence of charging VAT on research for research businesses is that it should increase the amount of VAT they recover on their cost base. It is possible that this is only achievable by renegotiating the partial exemption special method with HMRC, which can sometimes be a lengthy process.
Charges and changes: Both research providers and recipients (normally fund managers) need to consider how the change in VAT treatment of research services following MiFID II will impact their businesses. Even in cases where the change does not increase the cost to business, the changes are likely to have an impact on the VAT reporting function. 
Malcolm Winter, BKL (
Issue: 1395
Categories: In brief