ECJ Clarifies VAT Rules for Fund Management in BlackRock Case

BlackRock Investment Management UK (BlackRock UK), part of the BlackRock Financial Management Inc. (BFMI), a US-based company within the same corporate group, found itself in a legal dispute with HMRC over whether the services provided by BFMI through the Aladdin platform, developed by BFMI, to BlackRock UK for managing special investment funds, should be exempt from VAT under EU VAT Directive. The case centers around the correct application of the VAT exemption to mixed-supply fund management services.

Background of the Case 

BlackRock UK is a representative member of the UK VAT group, which includes several fund management companies, and manages both special investment funds and other types of funds. Notably, the special investment funds BlackRock manages account for only a small portion of total assets or the number of funds managed. Moreover, to manage all its funds, BlackRock UK receives services from BFMI.

Services provided by BFMI to BlackRock UK are delivered through the Aladdin platform, which combines technology and human expertise to support portfolio management, market analysis, regulatory monitoring, and trade execution.

Regarding the services provided, they were treated as a single composite supply, regardless of which type of fund they serve. Since the BFMI operates outside the UK, BlackRock UK was required to account for VAT on these cross-border services under the reverse charge mechanism in line with Article 196 of the EU VAT Directive. Furthermore, between January 1, 2010, and January 31, 2013, BlackRock treated received services for managing its special investment funds as exempt from VAT under Article 135(1)(g) of the EU VAT Directive.

As a direct consequence of this approach, the VAT was applied only to a portion of services used to manage its other, non-exempt funds, with the amount calculated proportionally based on the relative value of those funds within its total portfolio. 

However, HMRC, the UK Tax Authority, disagreed with this interpretation and issued VAT recovery notices for amounts that had not been accounted for during that period. Upon BlackRock UK's appeal, the First-tier Tribunal (FTT) upheld HMRC's decision. Following the FTT's decision, BlackRock UK appealed to the Upper Tribunal.

In its appeal, BlackRock UK argued that the services it used through the Aladdin platform for managing special investment funds should be exempt from VAT, as they relate directly to fund management activities covered by the exemption. 

Moreover, the company claimed it could identify and calculate the value of these exempt services based on their proportion of total funds under management. HMRC, on the other hand, agrees, stating that all services provided through the Aladdin platform should be subject to VAT because the majority of BlackRock’s managed funds were not special investment funds.

Due to the nature of the disagreement, the Upper Tribunal decided to pause the court proceedings and refer specific legal questions to the Court of Justice of the European Union (ECJ) for a preliminary ruling.

Main Questions from Request For Ruling

The primary focus of the Upper Tribunal was the interpretation of Article 135(1)(g) of the VAT Directive. More specifically, the Upper Tribunal asked whether, in a situation where a single supply of management services is provided by a third-party supplier to a fund manager, and those services are used both for managing special investment funds and for other, non-special funds, the entire supply should be subject to one uniform VAT treatment or whether it should be split.

The Upper Tribunal sought clarification on whether this single supply should be taxed at one rate or whether the value of the service should be divided based on its actual use, for example, by apportioning it according to the relative size of the funds managed, treating part of the service as exempt and the remainder as taxable.

Applicable EU VAT Directive Article

In addition to Articles 1(2) and 2(1)(c), which state that VAT is charged on each transaction based on the price of the goods or services, after deducting any VAT already incurred on their cost components, and that all supplies of services made for consideration within a EU country by a taxable person are subject to VAT, respectively, Articles 131, 135(1)(g) and 196 were in focus of the ECJ.

Article 131 is part of Title IX of the EU VAT Directive, which covers exemptions and specifies that EU countries must apply them under certain conditions designed to ensure proper implementation and prevent tax evasion or abuse. Article 135(1)(g), which is part of the referred questions, is also part of Title IX, and requires EU countries to exempt from VAT the management of special investment funds, as defined under their national laws.

Lastly, Article 196 provides that when a taxable person receives services from a supplier not established in their EU country, the recipient is responsible for paying the VAT under the reverse charge mechanism.

United Kingdom National VAT Rules

Under national legislation, Section 31(1) of the UK Value Added Tax Act 1994 provides that a supply of goods or services is treated as exempt from VAT if it falls within one of the categories listed in Schedule 9 of the Act. Notably, Group 5 of the stated Schedule, which deals with financial services, explicitly exempts the management of certain designated investment entities and types of funds.

However, the Upper Tribunal noted that these entities and funds are regarded in the UK as special investment funds, which correspond to the category of funds eligible for VAT exemption under Article 135(1)(g) of the EU VAT Directive.

Importance of the Case for Taxable Persons

Applying VAT exemption rules is always tricky, especially in borderline cases. Therefore, the BlackRock case not only provides a direct answer to the question of how to apply VAT exemptions to mixed-supply fund management services, but also offers guidance for any future similar dilemma.

The case clarifies whether cross-border services integral to managing exempt funds can remain VAT-exempt when bundled with services for taxable funds, potentially affecting VAT accounting, compliance obligations, and recovery positions for fund managers across the EU.

Analysis of the Court Findings

Firstly, the ECJ underlined that, under established case law, the exemptions in Article 135(1) of the VAT Directive are autonomous concepts of EU law intended to ensure the uniform application of the VAT system across the EU. The ECJ also added that these exemptions must be interpreted strictly, as they represent exceptions to the general rule that VAT applies to all services provided for consideration by a taxable person. Consequently, if the supply of services does not qualify for the exemption, it remains subject to VAT.

As a starting point, the ECJ examined whether the services supplied by BFMI to BlackRock UK through the Aladdin platform should be treated as a single supply for VAT purposes. The Advocate General noted in its opinion that the value of the services supplied through the Aladdin platform lies in the combined use of its multiple functionalities. 

For the recipient, these services constitute a single, indivisible economic supply. Notably, the ECJ stated that the Upper Tribunal had already treated the services in question as a single supply and that, for the preliminary ruling, they must be understood as such.

Additionally, the ECJ clarified that the concept of a single supply can arise in two distinct situations. First, a single supply may consist of a principal service accompanied by one or more ancillary services, which share the same tax treatment as the principal supply. Second, a single supply may comprise inseparable elements that cannot be distinguished as principal or ancillary. In the latter case, all elements are treated equally as part of one indivisible supply.

The UK argued that, in the present case, the supply consists of two elements. The first element is an ancillary supply relating to the management of special investment funds, and the second one is a principal supply relating to the management of other funds. Furthemore, the UK stated that the ancillary element should follow the tax treatment of the principal element, meaning it should be taxed in the same way as services for other funds, without benefiting from the exemption under Article 135(1)(g) of the EU VAT Directive.

However, in practice, the UK does not separate the supply into principal and ancillary elements. Thus, these elements are distinguished as two different uses of the same services provided by the Aladdin platform. One use is for managing special investment funds, and the second use is for managing other funds.

Moreover, the ECJ noted that services provided by a platform like Aladdin, including market analysis, performance monitoring, risk assessment, regulatory compliance checks, and transaction implementation, constitute successive steps, all equally essential to carry out investment transactions properly. Therefore, it is not possible to separate them into principal and ancillary elements. As a result of this interpretation, the supply must be treated as a single, indivisible supply in which all components are of equal importance.

The ECJ also referred to BlackRock UK's remarks that the general principle, namely that when several elements are classified as a single supply, they must be subject to a single VAT rate, should not apply in its case. BlackRock claimed that although the elements of a single supply cannot be taxed separately, the overall tax treatment of the single supply can vary depending on how it is used, citing a previous ECJ ruling. However, the ECJ held that the earlier decision was irrelevant to the case at hand.

In addition to the previous case focusing on the exemption provided by Article 132(1)(f) of the EU VAT Directive, the ECJ stated that the wording of Article 135(1)(g) does not allow the tax treatment of a single supply to vary according to its different uses. Thus, applying the principle that a single supply must be treated uniformly, and the supply at issue must be subject to a single, consistent VAT treatment.

Notably, the ECJ did not accept the Upper Tribunal's conclusion that all services provided through the Aladdin platform could be taxed if most of the services relate to non-special investment funds, or, conversely, be exempt if most relate to special investment funds. The ECJ stated that the tax treatment depends on the type of service, not on the majority of funds managed.

This reasoning was backed by the ECJ's conclusion that applying a single VAT rate based on the principal use of services provided through a platform like Aladdin could result in the exemption for managing special investment funds being incorrectly extended to other funds. Consequently, a manager whose primary business is managing special investment funds could claim the exemption for all fund management services, including those for non-special funds. 

Accepting such an interpretation contradicts the strict interpretation required for the exemption under Article 135(1)(g). Considering the strict interpretation, to qualify as an exempt service under Article 135(1)(g), services provided by a third-party manager must constitute a distinct whole that effectively performs the specific, essential functions of managing special investment funds. In this case, services supplied by BFMI are designed to manage investments of various types and can be used equally for special investment funds and other funds. 

Courts Final Decision

Following its elaborate and methodical analysis, the ECJ ruled that Article 135(1)(g) must be interpreted and understood to mean that a single supply of management services provided through a third-party software platform, such as Aladdin, to a fund management company, in this case BlackRock UK, that manages both special investment funds and other funds does not qualify for the exemption.

Conclusion

Ultimately, the ECJ BlackRock UK, must account for VAT on the full cost of the services it receives from BFMI through Aladdin, even if part of the services are used to manage special investment funds. Furthermore, the ruling confirmed that since services are considered a single, indivisible supply, the VAT treatment must be uniform. Consequently, HMRC can seek to recover VAT that BlackRock UK did not account for when it applied its previous pro rata exemption approach.

Source: Case C‑231/19 - BlackRock Investment Management (UK) v Commissioners for Her Majesty’s Revenue & Customs, EU VAT Directive