On 17 June 2021, the European Court decided the joint cases K (C-58/20) and DBKAG (C-59/20) regarding whether the supply of certain services constituted the “management of special investment funds”, benefiting from the VAT exemption enshrined in Article 135(1)(g) of Council Directive 2006/112/EC.
The cases
In the first case, K computed the taxable income of unit holders in the funds. In the second one, DBKAG acquired the right to use software used for risk management and performance measurement. The Austrian tax authorities argued that the exemption could not cover these services since: (a) they were not specific to and essential for the management of special investment funds; and (b) they were not sufficiently autonomous to come within the scope.
The European Court decided that the exemption did apply to these services. First, it clarified that VAT could not be said to apply only because the services are not outsourced in their entirety. Secondly, the Court emphasised that the list of Annex II to the UCITS Directive is not exhaustive, so whether certain services are included or not in that list is not conclusive.
The impact for the UK post-Brexit
Following the European Union (Withdrawal) Act 2018 (the “WA”), UK courts are no longer bound by principles laid down by the European Court, whilst general principles of EU law are not part of UK domestic law if they were not recognised as such in a case decided before Brexit. In addition, Chapter 5 of the Trade and Cooperation Agreement between the UK and the EU, which governs tax issues, does not establish any exceptions regarding VAT legislation but only obligations related to fraud.
However, the WA does allow UK courts to consider European Court decisions post-Brexit if they are relevant to any matter before a UK court. UK VAT rules remain the same after Brexit, including the investment management exemption (Group 5, Schedule 9 of the VAT Act 1994), so UK courts could take the DBKAG & K decision into account if they considered it relevant.
What does this mean for UK taxpayers?
The European Court decision widens the scope of services that benefit from the exemption, although it is unclear how far it goes, particularly considering that the Annex II list is not exhaustive.
Certain services which had not previously been considered to be within the scope of the exemption could arguably now be included. Where input VAT has not been deducted by customers, suppliers of the relevant services could potentially seek to recover the VAT charged on those services from HMRC and then reimburse it to the customers under HMRC’s reimbursement arrangements.