Author: Lionel van Rey
On 2 July 2020 the EU Court of Justice released its latest ruling on the application of the VAT exemption for the management of special investment funds. This time it concerned BlackRock Investment Management (UK) Ltd (“BlackRock”). As a manager of investment funds BlackRock provided investment management services to both special investment funds and other funds. In respect of the management of special investment funds BlackRock applied a VAT exemption in line with UK VAT law and the EU VAT Directive. On the other hand, BlackRock charged VAT on its services that related to the management of all other funds.
To perform its management services, irrespective of whether it was for special investment funds or for other funds, BlackRock procured specialized services from its US based affiliate BlackRock Financial Management Inc. (“BFMI”). Since BMFI, as an overseas vendor, supplied said services to a UK based business registered for VAT, the services were deemed to take place in the UK in accordance with the place of supply rules applicable in UK VAT.
Although BlackRock originally self-accounted for UK VAT in accordance with the reverse charge mechanism, it soon changed its view and held that the services it procured from BMFI should benefit from the VAT exemption for the management of special investment funds to the extent that said services were used for BlackRock’s services to special funds.
The UK tax authorities disagreed with this newly adopted approach and after several instances in UK courts the case was ultimately referred to the EU Court of Justice for a preliminary ruling.
In its ruling the EU Court of Justice spent considerable time on the analysis of the BMFI services. This analysis principally revolved around whether the BMFI services, which consisted of multiple elements, should be regarded as a single indivisible supply of a service or whether the multiple elements qualified as separate and individual services in their own right. The EU Court of Justice did not stray from the conclusion of the UK courts that the fund management services by BMFI qualified as a single supply of a service and that therefore, unlike BlackRock argued, the BMFI services could not be split up in such a way that a portion of it benefited from the VAT exemption and another portion would be subject to VAT. The EU Court of Justice upheld that where a single service is supplied, that service generally can only be subject to a single VAT treatment.
In light of the conclusion that BMFI’s service constituted a single supply, it remained to be determined whether said service as a whole would either be subject to VAT or exempt from it. The EU Court of Justice concluded that this assessment cannot be based on the observation that the majority of BlackRock’s operations for which the BMFI services were used consisted of the management of other funds than special funds. Instead the EU Court of Justice held that the nature of BMFI’s services, which were used both for the management of special investment funds and other funds, did not form a distinct set of services which in effect fulfilled the specific and essential functions of the management of special investment funds. With these services not being specifically designed for the management of special investment funds alone, the EU Court of Justice ruled that BMFI’s services were too generic to fall within the scope of the exemption for the management of special investment funds. As such the services were subject to UK VAT.