The CJEU’s decision in BlackRock Investment Management v HMRC
In summary, the CJEU agreed with the AG that such supplies could not fall within the scope of the exemption in Article 135(1)(g) of the Principle VAT Directive (PVD) to any extent.
The services in question are supplied via a software platform called Aladdin. The platform is used by BlackRock to provide essential information to portfolio managers on every aspect of the investment lifecycle. The services enable portfolio managers to make investment decisions and monitor regulatory compliance, and are used by BlackRock for the management of both SIFs and non-SIFs.
The Aladdin platform is owned by a BlackRock entity in the United States, which supplies its services to BlackRock in the UK in return for fees that are largely calculated by reference to the value of assets under management. As the services are purchased from the United States, BlackRock accounts for VAT on the supplies under the reverse charge mechanism, meaning that any apportionment would have been conducted by BlackRock (and not the supplier).
BlackRock did not dispute that the supply of services in question was a single supply but argued that it should nonetheless be entitled to apportion the platform fees and to account for VAT only on the part of the fees that was referable to BlackRock’s use of the Platform to manage non-SIFs. It proposed to apportion the fees in accordance with the value of assets under management in the SIF and non-SIF funds for the management of which the platform was used.
The CJEU rejected BlackRock’s argument and found that the Aladdin supplies were taxable in their entirety.
The general rule, confirmed by the case law of the CJEU, was that a single supply of services must be subject to a single rate of VAT. The CJEU’s decision to allow apportionment in the case of Commission v Luxembourg was said to be irrelevant because the cost-sharing exemption in issue in that case provided for differentiated tax treatment depending on the use made of the supply. By contrast, the exemption for the management of SIFs under Article 135(1)(g) was “defined exclusively in relation to the nature of the supply in question” (emphasis added) and therefore did not allow an apportionment of a single supply according to how it is used (at paragraph 39).
Furthermore the CJEU held that, contrary to statements made by the Upper Tribunal, it would not be appropriate to determine the single VAT treatment to be applied to the supply according to the nature of the majority of the funds managed, as this would have the impermissible effect of extending the exemption to the management of non-SIFs (even if this represents a small proportion of the funds managed). This point was not directly relevant to BlackRock because the majority of the funds for which BlackRock used the Aladdin platform were non-SIFs. However, it will be relevant to other firms that predominantly manage SIFs and a question remains as to whether there might be a threshold below which any non-SIF usage is to be disregarded as de minimis.
The AG’s opinion noted that exemption may apply where services provided specifically for SIFs are able to be identified "precisely and objectively" and this may have a bearing on how investment managers elect to receive future services from third-party providers.
Undermining the VAT exemption
The CJEU’s concern appears to be that the exemption for SIFs could end up applying to non-SIFs and seems to have been triggered by how they understood the supplies to have been used in BlackRock’s case. In particular, in BlackRock’s case, the services were used predominantly towards the management of non-SIFs.
The danger with the CJEU’s decision is that it has thrown the baby out with the bathwater and made it difficult for the exemption to apply to most businesses that manage SIFs in the real world.
The purpose of the exemption in Article 135(1)(g) is to facilitate collective investment through certain investment vehicles (i.e. SIFs) by removing VAT from the cost of managing those vehicles. The result sought by BlackRock, whereby the costs are apportioned so that the element relating to the management of SIFs is exempt, and the element relating to the management of non-SIFs is taxable, appeared to be commercially sensible as a way of achieving the purpose of the exemption.
In addition, Blackrock predominantly managed non-SIFs, but there are many portfolio managers who predominantly manage SIFs. The CJEU’s judgment arguably implies that any non-SIF usage will mean the exemption is lost in respect of management functions outsourced by the manager. But that would give rise to some absurd results, would distort how businesses are operated, and could undermine the purpose of the exemption.
How to address the CJEU’s concern in the real world
If a “real world” solution can be drawn from the decision it starts from the fact that services do not have to be "specific and essential" to the management of SIFs, as opposed to other types of funds. It has always been difficult to conceive of any services that would apply solely to the management of SIFs and, indeed, the CJEU’s decision in GFBK (C-275/11) confirmed that investment advice fell under the exemption for the management of SIFs, whilst Abbey National (C-169/04) confirmed the same in relation to fund administration. In fact, the CJEU focused on how the supply is used – and whether it was being used in respect of non-SIFs as well as SIFs – rather than suggesting that it is necessary to look at the essence of the supply, abstracted from how it is used in practice.
What that means is that investment managers will need to put in place systems that separate services relating to the management of SIFs from services that relate to the management of non-SIFs. Many investment managers will already receive services from the same supplier in respect of both SIFs and non-SIFs, for example services of fund administration (which, as noted above, is capable of falling within the exemption following the CJEU’s decision in Abbey National).
If the exemption is to serve any purpose for such businesses, then it must still be possible for those managers to separate out the management of SIFs and non-SIFs. Those managers will need to take extra care to ensure that the services relating to the management of the SIFs can be defined "precisely and objectively" (in the sense that there are separate supplies in relation to each individual fund).
It is likely that few investment managers or suppliers will have historically apportioned fees for single supplies in the manner proposed by BlackRock. As such, for most investment managers that manage SIFs and non-SIFs the CJEU’s decision is a warning when considering for the future how to structure arrangements under which management functions are outsourced.
On the positive side, the Upper Tribunal has found that provision of the Aladdin platform was a service of management, and considered this point to be sufficiently clear as not to require referral to the CJEU. The BlackRock decision is the latest in a line of cases showing that the traditional understanding of "management" was too narrow, and this case is particularly interesting given its consideration of how new technology can fit within the definition of management.
As an aside, an interesting question arises as to whether the UK courts are ultimately bound to follow the decision in BlackRock in light of the UK’s withdrawal from the European Union. The Draft European Union (Withdrawal) Act 2018 proposes that EU case law and general principles in place before the end of the transition period on 31 December 2020 will continue to be applied by UK courts, although the Supreme Court will not be bound by any retained EU case law. Regulations may, however, be made to extend this power to certain other courts and tribunals and the Government has recently launched a consultation to seek views on if, and under what circumstances, the Court of Appeal and the High Court of Justice, and equivalent courts in other UK jurisdictions, should be permitted to depart from retained EU case law.
The CJEU’s judgment can be read here: BlackRock judgment
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