VAT on outsourced fund management services

HMRC has published new Guidelines for Compliance, GfC20, setting out its recommended approach to determining whether outsourced fund management services constitute a single supply or multiple supplies for VAT purposes.

The guidance is relevant to fund managers, fund administrators and other businesses providing or receiving outsourced fund management services. While it does not change the underlying VAT legislation, it provides a clearer indication of how HMRC expects businesses to analyse and evidence their VAT treatment.

Why does the supply analysis matter?

The management of certain qualifying funds can be exempt from VAT under Items 9 and 10 of Group 5, Schedule 9 to the Value Added Tax Act 1994. However, the exemption does not automatically apply simply because an outsourced service is used by a fund manager making exempt supplies. The service itself must meet the conditions for exemption. In particular, it must form a distinct whole and be specific to, and essential for, the management of a qualifying fund. Services that are merely physical or technical in nature will not qualify.

Before considering whether the exemption applies, the supplier must first identify what is being supplied. This can be particularly complex where an outsourced service provider supplies a range of services across several funds, sub-funds or share classes under one Master Services Agreement, or MSA.

The distinction between a single supply and multiple supplies can have a significant impact on the VAT outcome:

• a single supply has one VAT liability
• a single supply cannot be apportioned between qualifying and non-qualifying funds
• for the whole supply to be exempt, it must be provided solely in respect of qualifying funds
• where there are genuinely multiple supplies, the VAT treatment of each supply can be considered separately.

What does GfC20 change?

GfC20 is not intended to introduce new single and multiple supply rules for the fund management sector. The practical significance of GfC20 is that it sets out the factors HMRC expects businesses to consider when applying these principles to outsourced fund management arrangements. It also emphasises that the outcome should reflect the commercial and economic reality, rather than relying solely on the wording or structure of the contract.

The VAT technical principles broadly remain that separate and independent elements should be treated as separate supplies. However, where the elements are so closely linked that they form a single, indivisible economic supply, they should not be artificially separated. Similarly, an element that is ancillary to a principal service will normally form part of the same supply.

HMRC’s four indicators

HMRC identifies four indicators that should be considered when determining whether an arrangement comprises a single supply or multiple supplies:

1. The number of suppliers
   Services provided by separate legal entities cannot normally be combined into a single supply.
2. The view of the typical customer
   The relevant question is whether the fund manager or other customer is purchasing one overall package or distinct and independent services.
3. The contractual terms and economic reality
   Contracts are the starting point, but they must be considered alongside how the services are commissioned, delivered, priced and invoiced in practice.
4. The intention of the legislation
   The supply analysis should not be used to extend the scope of the VAT exemption beyond what the legislation permits.

No individual indicator determines the outcome. The central question is whether it would be artificial either to separate the services or to bundle them together. Each arrangement must therefore be reviewed on its own facts.

The contract is not conclusive

A key message from GfC20 is that the existence of a single contract does not, by itself, establish that there is a single supply.

Businesses should consider the complete contractual framework, including fund-specific schedules, service descriptions, pricing documents and invoices. They should also examine how the arrangement operates in practice, including who selects the services, whether separate decisions are made for each fund and whether outputs are genuinely separable.

Where the overarching contract does not accurately reflect the economic reality, HMRC may expect the business to provide evidence of contractual variations or other documentation supporting the position adopted. The documentation and day-to-day operating model should therefore be consistent with the VAT analysis.

What should businesses do now?

Fund managers and outsourced service providers should review their existing arrangements and consider:

• which funds qualify for VAT exemption
• whether the services constitute a single supply or multiple supplies
• the level at which each supply is made
• whether the contracts reflect the actual commercial arrangements
• whether services, outputs, pricing and invoices are separated by fund
• whether the current VAT treatment remains supportable
• whether sufficient evidence is retained to demonstrate the basis of the treatment adopted.

The priority should be to establish the commercial and economic reality, then ensure the contracts, pricing model, invoicing, and operational evidence accurately reflect that position.

Where a historic error is identified, a correction may need to be made. HMRC has asked businesses to include ‘GfC20’ in the reason-for-error box where a correction results from applying the guidance.

For more information on how GfC20 may affect your business, please contact your usual Crowe UK contact.