According to a German saying, “before the court and at sea, one is in God's hands.” The CJEU’s decision in Blackrock shows that, for investment managers, VAT is indeed a rough sea. Going beyond the question that had, strictly speaking, been referred to it, the CJEU’s decision indicates that the “Aladdin services” at issue in the case fall outside the scope of the VAT exemption for the management of special investment funds (article 135(1)(g) of the Principal VAT Directive).
Through an online platform named Aladdin, portfolio managers were provided with market analysis and monitoring, regulatory compliance and execution services to assist them in making and implementing investment decisions. The portfolio managers used these Aladdin services to assist them in managing a number of funds. These funds included some SIFs, but the majority were not SIFs.
As the management of SIFs is exempt from VAT, the taxpayer argued that the Aladdin services should be exempted from VAT to the extent that they were used by the portfolio managers to manage the SIFs. This argument centred around two issues: the exemption issue and the apportionment issue, and the question referred to the CJEU concerned only the latter.
- Exemption issue: The UK’s First-tier and Upper Tribunals agreed that, at a matter of principle, the Aladdin services could constitute “management of SIFs” so as to fall within the VAT exemption. Given the Upper Tribunal's view that, in light of existing CJEU case law, “the concept of “management of a special investment fund” is one that is readily applicable by the national courts and tribunals, and [...] requires no elaboration”, no question in respect of the exemption issue was referred to the CJEU. So, the taxpayer may be forgiven, if it thought that the issue had been settled in its favour (subject to an appeal to the next higher UK court).
- Apportionment issue: Given that the Aladdin services were, however, used mainly for the management of non-SIFs, the Upper Tribunal asked the CJEU to clarify, in effect, whether the consideration for the Aladdin services should, in its entirety, be subject to VAT or whether such part of the consideration as corresponds to the use of the Aladdin services for the management of the SIFs should be exempted.
Nature, not use, of services is key
Unfortunately for the taxpayer, the CJEU appears to have re-opened the exemption issue and, unlike the UK’s First-tier and Upper Tribunals, decided it against the taxpayer.
Whether or not a particular service falls within the VAT exemption for the management of SIFs must be determined by reference to the nature of the service, rather than the use to which it is put (although it seems that the use to which it is put may shed some light on the nature of the service). So:
- The nature (i.e. SIF or non-SIF) of the majority fund for the management of which the Aladdin services are used cannot be determinative of the VAT status of these services as this “could lead to the benefit of the exemption for the management of special investment funds being accorded to other funds… contrary to the strict nature of the interpretation given to the exemption”.
- The consideration for the Aladdin services cannot be apportioned into a VAT exempt and a VAT-able element on the basis of the nature of the funds for the management of which the services are used: “The wording of [the exemption] does not…permit the tax treatment of a single supply to be dissociated according to its uses.”
What if there were two contracts?
It had been common ground that the Aladdin services constituted a single supply for VAT purposes which was used partly for the management of SIFs and of non-SIFs. What if the transaction had, instead, involved two separate supplies (i.e. if the portfolio managers had entered into two separate contracts, one for SIF-related Aladdin services and one for non-SIF-related Aladdin services)?
Whilst this may have turned the tide, if the case had turned on the apportionment issue, it seems unlikely that it would overcome the stronger counter-current created by the CJEU’s view on the exemption issue.
The CJEU appears to be suggesting that the Aladdin services cannot fall within the VAT exemption for the management of SIFs because they have been designed to be, and are actually, used by portfolio managers for the purpose of managing non-SIFs as well as SIFs. If this is, indeed, the implication of the decision, it suggests that the issue could not be resolved by splitting a services contract into SIF and non-SIF elements – unless this split corresponds to a difference in the nature or design of the services. Moreover, whilst it is arguable that more weight should be given to the design element, this is not clear from the decision. So, taken to its extreme, it may suggest that it could be argued that any non-negligible use of services provided in respect of SIFs for the purpose of managing non-SIFs could taint the exempt status of the service as it is evidence that the service does not represent a specific, essential function of the management of SIFs.
It can only be hoped that national courts will interpret the CJEU’s decision in a sensible manner, mindful of the fact that it relates to a case concerning a single supply mainly used for the management of non-SIFs where the CJEU was clearly concerned that the VAT exemption for the management of SIFs could be extended beyond its proper scope.