[2012] UKFTT 379 (TC)
TC02063
Appeal number:
TC/2010/07176
VAT – EXEMPT SUPPLIES – finance - whether appellant
supplied intermediary services or services of management and advice - held,
advice ancillary and predominant supply of intermediary services - whether
intermediary services in relation to item 6 (exempt) or item 9 (standard rated)
– held, in relation to item 6 appeal allowed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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BLOOMSBURY
WEALTH MANAGEMENT LLP
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Appellant
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- and -
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THE COMMISSIONERS
FOR HER MAJESTY’S
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Respondents
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REVENUE AND
CUSTOMS
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TRIBUNAL:
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JUDGE GREG SINFIELD
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PHILIP GILLETT
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Sitting in public in London on 4 May 2012
Mr Alan Pink of Alan Pink Tax
for the Appellant
Mr Philip Rowe of HM Revenue
and Customs for the Respondents
© CROWN COPYRIGHT
2012
DECISION
Introduction
1.
This appeal concerns the VAT liability of services supplied by
Bloomsbury Wealth Management LLP (“Bloomsbury”) to its clients. In January
2010, Bloomsbury made a claim, by way of voluntary disclosure, for repayment of
£258,592.22 output tax which Bloomsbury said it had accounted for in error
between 1 October 2005 and 30 September 2009. Bloomsbury had accounted for VAT
at the standard rate on its services which it now considered should have been
exempt intermediary services within item 5 of Group 5 of Schedule 9 to the VAT
Act 1994 (“VATA”). HM Revenue and Customs ("HMRC") rejected the
claim in a letter dated 16 July 2010, subsequently confirmed on a review, on
the ground that Bloomsbury's services were not within the exemption and were
chargeable to VAT at the standard rate. Bloomsbury now appeals against that
decision. The issue is whether the services supplied by Bloomsbury are
intermediary services within item 5 of Group 5.
Preliminary application to adjourn pending judgment of
Court of Justice
2.
Shortly before the hearing of the appeal, HMRC made a written
application for the hearing to be adjourned pending the judgment of the Court
of Justice of the European Union ("CJEU") in Finanzamt Frankfurt
am Main V-Höchst v Deutsche Bank AG (Case C-44/11). Bloomsbury objected to
the application. We heard the oral application at the start of the
proceedings. HMRC stated that the decision of the CJEU in Deutsche Bank
would effectively decide the outcome of Bloomsbury's appeal. The issue,
described further below, is whether Bloomsbury supplies exempt intermediary
services or taxable services of portfolio management. HMRC submitted that the
first question in Deutsche Bank is directly relevant to Bloomsbury's appeal. The first question asks the CJEU whether individual portfolio
management for individual investors is exempt from tax under Article 135(1)(f)
(transactions in securities or the negotiation of such transactions) of
Directive 2006/112/EC or whether the exemption only applies to the management
of collective investment funds within Article 135(1)(g) of Directive
2006/112/EC. HMRC said that the Advocate General was due to deliver her
Opinion on 8 May 2012. There was no date for the decision of the CJEU and HMRC
acknowledged that it may not be delivered for some months.
3.
Bloomsbury objected to the application to adjourn on grounds that it was
much too late to make such an application and that the Deutsche Bank
case was factually different from that of Bloomsbury. Bloomsbury pointed out
that its appeal was already over two years old, the case had been postponed
once before to allow the parties to try to reach agreement and an adjournment
to await the decision of the CJEU in Deutsche Bank could delay the
hearing for another six months or a year. Bloomsbury submitted that the Deutsche
Bank case would not necessarily determine the outcome of Bloomsbury's
appeal because it was not providing portfolio management or discretionary fund
management services but introducing its clients to providers who issue
securities to them.
4.
We decided to refuse the application to adjourn the hearing until the
CJEU had issued its judgment in Deutsche Bank. We considered that it
was not sufficiently clear from the terms of the reference provided to us that
the case would determine the issues in this appeal. From the brief terms of
the reference and on our understanding of the issues in this appeal, it
appeared that the Deutsche Bank case was concerned with the VAT treatment
of the providers of fund management services whereas Bloomsbury's appeal
concerned whether the services of introducing clients to such fund managers
fell within the exemption for intermediary services. We also bore in mind that
the adjournment could cause a significant further delay. If, having reviewed
the Advocate General's Opinion, either party considers that the decision of the
CJEU might show that our decision in this appeal contains any error of law then
that party can apply for permission to appeal and request a stay of
consideration whether to grant permission at that point.
Relevant legislation and guidance
5.
Section 31(1) VATA provides that supplies specified in Schedule 9 are
exempt supplies. Items 5, 6 and 9 of Group 5 of Schedule 9 are relevant in
this case. They provide as follows:
“5. The provision of
intermediary services in relation to any transaction comprised in item ... 6
(whether or not any such transaction is finally concluded) by a person acting
in an intermediary capacity.
6. The issue, transfer or
receipt of, or any dealing with, any security or secondary security being
(a) shares, stocks, bonds,
notes (other than promissory notes), debentures, debenture stock or shares in
an oil royalty …
(e) units or other documents
conferring rights under any trust established for the purpose, or having the
effect of providing, for persons having funds available for investment,
facilities for the participation by them as beneficiaries under the trust, in
any profits or income arising from the acquisition, holding, management or
disposal of any property whatsoever.
…
9. The management of—
(a) an authorised open-ended
investment company; or
(b) an authorised unit trust
scheme; or
(c) a Gibraltar collective
investment scheme that is not an umbrella scheme; or
(d) a sub-fund of any other Gibraltar collective investment scheme; or
(e) an individually
recognised overseas scheme that is not an umbrella scheme; or
(f) a sub-fund of any other
individually recognised overseas scheme; or
(g) a recognised collective
investment scheme authorised in a designated country or territory that is not
an umbrella scheme; or
(h) a sub-fund of any other
recognised collective investment scheme authorised in a designated country or
territory; or
(i) a recognised collective
investment scheme constituted in another EEA state that is not an umbrella
scheme; or
(j) a sub-fund of any other
recognised collective investment scheme constituted in another EEA state.”
6.
The relevant Notes to Group 5 are as follows:
“(5) For the purposes of item
5 “intermediary services” consist of bringing together, with a view to the
provision of financial services –
(a) persons who are or may
be seeking to receive financial services, and
(b) persons who provide
financial services,
together with (in the case of
financial services falling within item 1 ...) the performance of work
preparatory to the conclusion of contracts for the provision of those financial
services, but do not include the supply of any market research, product design,
advertising, promotional or similar services or the collection, collation and
provision of information in connection with such activities.
(5A) For the purposes of item
5 a person is “acting in an intermediary capacity” wherever he is acting as an intermediary,
or one of the intermediaries between
(a) a person who provides
financial services, and
(b) a person who is or may
be seeking to receive financial services.
(5B) For the purposes of
Notes (5) and (5A) “financial services” means the carrying out of any
transaction falling within item 1, 2, 3, 4 or 6.”
7.
HMRC's interpretation of the VAT liability of certain financial services
is set out in VAT Notice 701/49 (November 2011). Section 9 of the Notice deals
with supplies by intermediaries. Paragraph 9.1 describes an exempt supply of
intermediary services and states as follows:
“A supplier of an exempt
intermediary service is a person who:
·
brings together a person seeking a financial service with a
person who provides a financial service
·
stands between the parties to a contract and acts in an
intermediary capacity, and
·
undertakes work preparatory to the completion of a contract for
the provision of financial services, whether or not it is completed.”
8.
Paragraph 9.9 deals with the VAT liability of services supplied by
Independent Financial Advisers. It states as follows:
“If you only provide advice
your supply is taxable ….
If you act between your
customer and the provider of a financial product, and you meet the criteria set
out in paragraph 9.1, then your supply will be exempt.
If you provide both advice and
you act between your customer and the provider of a financial product it is
important to establish which of the two elements of your service predominates.
Where your advice directly results in your customer taking out a financial
product and you meet all the criteria for intermediary services in paragraph
9.1, the whole of your service – including the advice element – will be
exempt. The advice is seen as ancillary to an exempt intermediary service. If
you receive commission from the finance product provider, it is consideration
for a separate exempt supply by you of intermediary services.
If, on the other hand, your
advice far outweighs the work done to arrange a contract (for example, because
a customer has received a general financial health-check, with advice covering
a range of financial issues, but then only buys a minor product requiring
minimal intermediation), the intermediary service is ancillary to the advice,
and VAT is due on the whole supply.”
Facts
9.
Mr Jason Butler, a member of Bloomsbury Wealth, produced a witness
statement. He gave oral evidence and was cross examined by Mr Rowe. In
addition, we were provided with a bundle of correspondence and other
documentation. We find the facts to be as follows.
10.
Bloomsbury is an Independent Financial Adviser providing services in
respect of financial investments to high net worth individuals. An individual
who is considering whether to become a client of Bloomsbury will have an initial
meeting with Mr Butler at which they will discuss the individual's financial
circumstances, attitude to risk and needs in order to ascertain whether
Bloomsbury's services are appropriate for them and the appropriate mix of
investments. Bloomsbury provides high level advice to the client on asset
allocation, types of assets and choice of fund managers. Bloomsbury does not
provide portfolio management services and if it becomes clear at the initial
meeting that is what the client wants then Mr Butler would advise the client to
go elsewhere. The discussion will determine the appropriate investments in
order to meet the client's aims. If the individual decides to become a client,
Bloomsbury will arrange for the client's financial assets to be transferred to
Pershing Securities, a third party nominee unconnected with Bloomsbury. The
client gives Bloomsbury authority to communicate purchase instructions to
Pershing. When the money is received by Pershing, it sends an electronic
message to Bloomsbury and Bloomsbury then sends electronic instructions to
Pershing to purchase units in a fund or funds appropriate to the client's
circumstances and aims. Pershing acquires the investment products and holds
them on behalf of the client. Pershing sends the client an annual custody
report and six monthly investment performance reports (co-branded with Bloomsbury) although clients can also access that information at any time via their online
account.
11.
The investment products into which the client's money is transferred are
collective investment funds in which the client receives units in Exchange
Traded Funds, Open Ended Investment Companies or Unit Trusts. These products
are provided by a small range of third party fund managers such as Dimensional
Fund Advisors, BlackRock and Legal & General. Bloomsbury selects the funds
through its internal risk committee. The principal fund manager recommended by
Bloomsbury is Dimensional Fund Advisors. Mr Butler said that Bloomsbury did not make use of discretionary fund managers and used only passively managed,
ie index tracking, investment vehicles.
12.
After the investments have been acquired, Bloomsbury conducts a
quarterly "rebalancing" of the portfolio to ensure that it meets the
client's original stated wishes. The rebalancing exercise involves buying and
selling units in the client's investment portfolio to achieve the appropriate
balance of different investments. It was described by Mr Butler as an
automatic process which owed nothing to discretion but simply gave effect to
the plan agreed as part of the initial discussion. He said that it was an
important part of what Bloomsbury provided to clients. The rebalancing does
not involve the provision of any advice by Bloomsbury to the client. If a
client wished to sell any investments then Bloomsbury would send an electronic
instruction to Pershing to sell units. Pershing would enter into a transaction
with the fund manager and receive cash for the units. Pershing would inform
Bloomsbury that it had received cash and Bloomsbury would instruct Pershing to
pay the cash to the client's bank account.
13.
Bloomsbury charges its clients an initial fee and an annual fee, both of
which are based on a percentage of the value of the assets transferred. The
initial fee covers Bloomsbury's costs of buying the investments in the funds. Bloomsbury does not accept commission from the fund managers and any received is offset
against the annual fee due from the client.
Submissions of the parties
14.
Mr Rowe for HMRC put forward two arguments why Bloomsbury's services
were not exempt. The first argument was that Bloomsbury's intermediary
services related to item 9 of Group 5. Mr Rowe pointed out that Notes (5) and
(5A) to Group 5 define "intermediary services" and “acting in an
intermediary capacity” by reference to financial services. Note (5B) defines
"financial services" as transactions falling within item 1, 2, 3, 4
or 6 of Group 5. Mr Rowe submitted that the effect of Note (5B) is that only
intermediary services relating to transactions falling within item 1, 2, 3, 4
or 6 are exempt. He pointed out that Bloomsbury's clients' money was invested
in Exchange Traded Funds, Open Ended Investment Companies or Unit Trusts which
were all described within item 9. HMRC consider that a person who brings
together a customer and a manager of a collective investment fund in item 9
cannot be exempt as an intermediary. Bloomsbury introduced its clients to
managers of funds which fell within item 9 and it followed that such
intermediary activity was excluded from exemption by Note (5B).
15.
HMRC's second argument was that the elements of advice and management
formed the predominant part of the supply by Bloomsbury and the intermediary
element was ancillary so that the whole supply was chargeable to VAT at the
standard rate. Mr Rowe referred to tables of work carried out by Bloomsbury for new and existing clients which were provided to HMRC in a letter dated 22
June 2010 from Mr Pink. The tables showed that out of 32 hours spent in
relation to a new client, only five and a half hours related to the
introduction of clients to the investment funds. In relation to the existing
client, only three hours out of 18.5 hours related to negotiation and purchase
of units. HMRC's case was that Bloomsbury provides continuous management of
its clients' funds. Bloomsbury was mandated to buy and sell units on behalf of
its clients but that was a small proportion of it service. The rebalancing of
the clients' portfolios was no more than managing the portfolios.
16.
Mr Pink for the Appellant submitted that the services supplied by Bloomsbury fell within the words of item 5 of Group 5 when read with the notes to the
group. In order to fall within the exemption, there must be certain specified
exempt transactions and Bloomsbury must act as an intermediary in relation to
those transactions. In this case, Mr Pink said that Bloomsbury acted as an
intermediary in relation to transactions in item 6 (a) and (e) of Group 5
(namely, the issue, transfer or any dealing with shares or units etc.). He
submitted that the activities of Bloomsbury were within the guidance set out by
HMRC in Notice 701/49 at paragraphs 9.9 and 9.1. As set out in those
paragraphs, Bloomsbury both provided advice and acted as an intermediary
between the client and the provider of a financial product. The advice
resulted in the customer investing in a financial product and Bloomsbury met
all the criteria for intermediary services in paragraph 9.1 of the Notice. Bloomsbury did not act as an intermediary to arrange the provision of services of fund
management within Item 9 of Group 5. The purpose of Item 9 was to exempt the
management of specific funds. Bloomsbury introduced clients to fund managers
so that the clients could invest in the funds and not so that the clients could
receive fund management services.
17.
Mr Pink submitted that the advice given by Bloomsbury was ancillary to
introducing clients to the fund managers. He referred to Mr Butler's evidence
that where the client decided not to invest in funds chosen by Bloomsbury then there was no fee for the initial meeting and advice. Mr Pink acknowledged
that the breakdown of time spent in the tables referred to by Mr Rowe was one
measure of the relative predominance of elements of a supply but the charges made
were another possible measure. Mr Pink referred us to the well-known case of Card
Protection Plan Ltd v Customs and Excise (Case C-349/96) [1999] STC 270
which concerned the
situation where there is a principal element and one or more ancillary elements.
As the ECJ stated explicitly in paragraph 30 of the judgment:
“There is a single supply in
particular in cases where one or more elements are to be regarded as
constituting the principal service, whilst one or more elements are to be
regarded, by contrast, as ancillary services which share the tax treatment of
the principal service. A service must be regarded as ancillary to a principal
service if it does not constitute for customers an aim in itself, but a means
of better enjoying the principal service supplied.”
Discussion
18.
HMRC’s primary argument was that Bloomsbury was providing introductory
services but the introductions were to persons who did not provide financial
services as defined by Note (5B). HMRC's submissions were based on the view
that Bloomsbury was introducing its clients to providers of services of
management of special investment funds exempted by Item 9 of Group 5. It is
correct that the exemption for intermediary services is restricted to the
bringing together of someone who provides services falling within Items 1, 2,
3, 4 or 6 of Group 5 and someone looking to receive such services. We
consider, however, that HMRC are wrong to regard Bloomsbury's services as
predominantly the introduction of clients to fund managers with a view to the
clients receiving fund management services. On the evidence that we have seen,
we consider that what the clients sought and what Bloomsbury provided was,
initially, advice on the most appropriate investments for the client and,
thereafter, implementation of that advice. In our view, Bloomsbury introduced
clients to the fund managers and acted as an intermediary between the clients
and the fund managers for the purpose of acquiring and maintaining the
portfolio of investments on behalf of the clients. The fund managers also
provided fund management services to Bloomsbury's clients but that was a
necessary consequence of the fact that the clients held units in the funds.
Although we did not hear any evidence from clients of Bloomsbury, we regard it
as extremely unlikely that any client would have said that it engaged Bloomsbury so that it could be introduced to a fund manager. The evidence of Mr Butler and
a client planning report showed that Bloomsbury acted between its clients and
the fund managers to enable clients to acquire and dispose of units. Supplies
of such units are supplies of services within Item 6 of Group 5.
19.
HMRC’s alternative argument was that Bloomsbury supplied services of
wealth management and advice as well as intermediary services but that the
intermediary services were ancillary to the principal supply of wealth
management and advice. We do not accept that the division of time in the
tables in Mr Pink's letter of 22 June 2010 relied on by HMRC determines which
elements are principal or ancillary although we accept that time can be a
factor. In Card Protection Plan, the European Court of Justice placed
great stress on the intention of the customer in determining whether elements
are principal or ancillary. We have no doubt that clients considered the
advice they received at the initial meeting to be an important part of the
service provided by Bloomsbury. We consider that the fact that there was no
fee for that advice if the client decided not to invest shows that it was not
the most important part of the service to Bloomsbury or its clients. As
referred to in the previous paragraph, the evidence showed that the focus of Bloomsbury's services was the creation and maintenance of a portfolio of units for its
clients which is an exempt supply of intermediary services. In our view, the
initial advice was an ancillary service to the principal supply of intermediary
services relating to the acquisition, maintenance and disposal of the portfolio
of units.
Decision
20.
In the light of all the evidence and for the reasons discussed above, we
are satisfied that Bloomsbury provides exempt intermediary services to its
clients. Accordingly, we allow the appeal.
21.
This document contains full findings of fact and reasons for the
decision. Any party dissatisfied with this decision has a right to apply for
permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure
(First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be
received by this Tribunal not later than 56 days after this decision is sent to
that party. The parties are referred to “Guidance to accompany a Decision from
the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this
decision notice.
Greg Sinfield
TRIBUNAL JUDGE
RELEASE DATE: 13 June 2012
