VAT on fund management services: what does GfC20 mean for businesses?

HMRC’s new Guidelines for Compliance, GfC20, explains how businesses should determine the VAT treatment of fund management services, including services outsourced to third-party providers.

The guidance focuses particularly on whether outsourced services constitute a single supply or multiple separate supplies for VAT purposes. Fund managers and service providers should review whether their agreements, pricing and day-to-day delivery support the VAT treatment being applied.

What does GfC20 cover?

Fund managers typically enter into Master Services Agreements (MSAs) when outsourcing fund management services to a third-party. MSAs are often supplemented by more detailed arrangements that set out the specific services provided in relation to individual funds.

A key question is whether the services provided under the MSA form:

• A single supply of services that would be artificial to split, or
• Multiple separate supplies, each with its own VAT treatment.

HMRC confirms that the VAT treatment should be determined by the commercial and economic reality of the arrangement, rather than the contractual position alone.

Why single vs multiple supplies matters for VAT treatment

The starting point under general VAT principles is that distinct and independent elements of a transaction are normally treated as separate supplies. Each supply must then be considered individually to determine its VAT liability.

However, a supply should not be artificially split where its elements, viewed together, constitute a single supply from an economic perspective. GfC20 cites the settled case law Card Protection Plan Ltd (‘CPP’) v CEC (C-349/96) and Levob Verzekeringen BV v Staatssecretaris van Financien (‘Levob’) (C-41/04) as established routes to reaching that conclusion.

Where these principles do not provide a clear answer, HMRC sets out four ‘supplementary indicators’ that businesses should consider.

HMRC’s four indicators for determining single or multiple supplies

Are there multiple suppliers?

Supplies made by separate legal entities cannot normally be combined and treated as single supply.

Businesses should therefore begin by identifying which legal entity supplies each service and whether more than one supplier is involved in the overall arrangement.

How would a typical fund manager view the arrangement?

Businesses should consider how a typical fund manager, as the customer, would understand the services being received.

Would the fund manager regard the arrangement as one combined service covering all its funds, or as a set of individual services chosen separately for each fund?

The customer’s perspective is relevant, although it will not necessarily determine the outcome by itself.

Do the contractual terms reflect the economic reality?

The contractual documentation is an important starting point, but it isn’t decisive. It should reflect how the services are supplied in practice.

Factors that may point towards multiple supplies include:

• Separate documentation for individual funds,
• Services tailored to particular funds,
• Delivery that varies from fund to fund, and
• Fees calculated on a fund-by-fund basis.

By contrast, generic services delivered the same way across all funds, with no fund-level documentation and a single or apportioned price rather than a fund-specific fee, point towards a single supply.

Would treating the arrangement as a single supply extend the scope of the exemption?

The principles governing single and multiple supplies cannot be used to extend the scope of a VAT exemption beyond what the legislation allows.

The VAT treatment of the supply cannot be determined simply by the proportion of a service used for qualifying and non qualifying funds.

GfC20 refers to BlackRock Investment Management (UK) Ltd v Revenue and Customs Commissioners (Case C 231/19) in this context.

When do fund management services qualify for VAT exemption?

A supply by a third-party to a fund manager does not become exempt purely because the fund manager uses that supply to make exempt supplies. For a third-party service to qualify for exemption:

• The relevant fund must be a qualifying fund within Items 9 or 10 of Group 5, Schedule 9 to the Value Added Tax Act 1994, and
• The services must be specific and essential to the management of that qualifying fund.

HMRC states that services that are solely physical or technical in nature do not qualify for the exemption. The extent to which a service is correctly classified as such, would need to be assessed on a case-by-case basis.

The position should therefore be determined before the VAT treatment of each resulting supply is considered. A conclusion that several services form a single supply does not, by itself, mean that the supply is exempt from VAT.

What should fund managers and service providers do now?

GfC20 is broadly consistent with existing VAT principles, but the supplementary indicators aim to provide businesses with a clearer framework for reviewing their arrangements.

Difficulties may still arise where it is unclear whether services form a single supply or multiple supplies, particularly where an arrangement covers both qualifying and non-qualifying funds.

Fund managers and outsourced service providers should review their existing and proposed MSA structures and supporting documentation to ensure the VAT treatment is correct. Fund management services that have not been treated correctly for VAT purposes may require disclosures to amend the position, which carries the risk of penalties.

How Saffery can help

Our VAT specialists are helping fund managers and outsourced service providers understand how GfC20 applies to their arrangements.

We can review your agreements, supporting documentation and current VAT treatment, helping you identify potential risks and the practical steps needed to address them.

To discuss GfC20 and what it could mean for your business, please contact Nick Hart, VAT Partner.