HMRC confirms Model Portfolio fees VAT exempt

What has happened?

HMRC has issued an email to industry bodies to confirm its position on the VAT treatment of Model Portfolio fees. This has previously been an area of uncertainty both for advisers and discretionary fund managers.

The Government, last week, published a summary of responses to the VAT Fund Manager Review. The Government recognised in its response that concerns had been raised by industry that greater clarity was required where VAT exemption for fund management is being applied. The Government recognised that the current list of VAT exempt funds in the legislation (such as Authorised Unit Trusts, OEICS and Investment Trusts) were clearly defined and that list should be retained. Whilst this list covers the vast majority of fund types, the Government accepted that there were still areas of uncertainty where the fund management VAT exemption applied, in particular in relation to Model Portfolio fees.

It is understood that HMRC has generally accepted VAT exemption for fees charged in relation to the management of Model Portfolios. This was following a European Court case originating in Denmark which established certain tests that the management of Model Portfolios would generally meet. Businesses may have treated Model Portfolio fees as VAT exempt after receiving rulings from HMRC. However, there was no published HMRC guidance on this topic and therefore there remained a degree of uncertainty for the industry, in particular, as the UK legislation had not been updated to reflect this approach.

Following the completion of the VAT Fund Management Review, HMRC has issued an email to industry bodies to reassure Model Portfolio providers that the VAT exemption can continue to apply into 2024 and beyond albeit on a different legal basis. This is following engagement with industry body stakeholders and HMRC’s acceptance of the legal and technical analysis that a VAT exemption for financial intermediation can be applied.

HMRC has offered to engage with any impacted businesses and has also committed to updating its published guidance during the course of 2024.

As was previously seen with the Retail Distribution Review, VAT remains a complex area for financial advisers and discretionary fund managers and appropriate advice should always be taken to ensure the correct VAT treatments are being applied to fees for services.