Tribunal confusion over BlackRock VAT for financial services case
A dispute between investment management firm BlackRock and HMRC over VAT on financial services has seen the case referred to the European Court of Justice (CJEU) after the Upper Tribunal failed to reach a verdict, reports James Bunney
8 Jan 2019
BlackRock Investment Management (UK) Ltd v The Commissioners for HM Revenue and Customs:  UKUT 0415 (TCC) concerned the VAT liable on the provision of financial services. The UK arm of BlackRock, the world’s largest asset manager, received a service supplied by a US provider, BlackRock Financial Management Inc (BFMI).
The service, named Aladdin, contributes to the managing of BlackRock’s $6.29 trillion (£4.9 trillion) assets, including special investment funds (SIFs). The management of SIFs is exempt from VAT under Article 135.1(g) of the Principle VAT Directive.
HMRC determined that BlackRock was liable to VAT on the use of the Aladdin service under the reverse charge mechanism. BlackRock appealed as the service was used to manage SIFs and was, it claimed, therefore exempt.
The First Tier Tribunal (FTT) concluded that although the service was ‘management’ and therefore exempt in theory, it was not possible to apportion between the use of the service for SIFs and non-SIFs, in which case the service should be standard-rated.
Both BlackRock and HMRC pursued an appeal to the Upper Tribunal. HMRC argued that ‘the exemption only applies where all or substantially all of a particular function of fund management is outsourced’ and that this was not the case for Aladdin as the companies were related.
BlackRock maintained its position that Aladdin was a management service, as determined by the FTT, and this was upheld by the Upper Tribunal. However, the company’s claim that apportionment being ‘consistent with the actual use of the Aladdin services which…accords with the purpose of the exemption’ was rejected. The Upper Tribunal noted that the FTT considered this a ‘startling and novel proposition’.
The Upper Tribunal agreed that Article 135.1(g) of the Principle VAT Directive allows that a single supply can ‘be bifurcated in to two elements, one exempt and one taxable’. However, it also determined that ‘it is equally arguable that such an apportionment cannot apply’.
Aladdin is a complex service that involves ‘a combination of hardware, software and human input’ and in the view of the Upper Tribunal it is not possible to say which aspects of it were put to use at any given time and whether it was being used for SIFs or non-SIFs. While it agreed that Aladdin does constitute a management service, the question remained of apportionment.
It considered the precedent set by the CJEU in European Commission v Grand Duchy of Luxembourg (Case C-274/15) ECLI:EU:C:2017:333, which provided a ‘cost-sharing exemption’ in cases where VAT-liable services are supplied to a diverse group by one entity, such as multiple doctors sharing a receptionist.
However, the tribunal noted that in Luxembourg ‘no reference was made to the possible effect, if any, of the general rule that a single supply should have a single VAT treatment or the rules on composite supplies’. It sought a precedent that could resolve the dispute but was unable to find one.
Having failed to find a precedent the Upper Tribunal judged that the appeal should be stayed and referred to the CJEU as it did not regard the case law of the CJEU ‘in particular in the light of the Luxembourg case, as clear’.
Report by James Bunney