In the UK, DFMs said they were waiting to see guidance HM Revenue & Customs (HMRC) has said it plans to issue before taking action, such as by raising their management fees.
A spokesman for HMRC said a timescale as to when the guidance would go out had not yet been set.
"If HMRC does decide that a change in tax treatment is required to comply with the Deutsche Bank/ECJ judgement, taxpayers can rely on the treatment outlined in our current guidance until the date is announced that the policy change takes effect, and no changes will be applied retrospectively," he added.
David Cowell, director at Myddleton Croft Investment Managers in Leeds, said the VAT ruling, though it had come as a surprise for many, was "not a deal-breaker by any stretch of the imagination; straightforward discretionary management fees have been subject to VAT all along, and this has not changed”. He added that he was speaking without the benefit of knowing how HMRC would react.
“All that has happened is that this judge has come out and said that perhaps you should not separate out the dealing commissions or dealing charges – which everybody has assumed were VAT exempt in the past – from the [rest of the] transaction, that it should be treated as one service, which, if part of this service is subject to VAT, so the whole should be.”
For DFMs like Myddleton Croft, Cowell said, the likely question will be whether to pass the added VAT charge on to their clients, in the form of a fraction of a percentage on their fees, or absorbing it.
Yesterday’s ruling, by a court which was formally considering an opinion given in May, found that Deutsche Bank was not exempt from charging VAT on its services, in a case involving the bank and Finanzamt Frankfurt am Main V Hochst, a German tax body.
The VAT charge is on services supplied to individual investors. There is an exemption (which wasn’t disputed) for investment advisory services provided to most collective investment funds.
A key paragraph in the ruling noted: "It is apparent…that it is not possible to regard the elements of which that [portfolio management] service consists as constituting a principal service on the one hand, and an ancillary service on the other. Those elements must be placed on the same footing.
"In that regard, it is established case-law that the terms used to specify the exemptions referred to…are to be interpreted strictly."
Gerry Brown, technical manager at Prudential, concurred with Myddleton Croft’s Cowell that the ECJ ruling was "probably not a game changer", but noted that "having a VAT charge levied where none was before, will impact investors".
"Can ‘managers’ absorb the VAT cost? Possibly some of it, [although] there is lots of comment at the moment about the cost of investment advice."
HMRC ‘welcomes’ ruling
In a statement, HMRC said it welcomed the ECJ judgement.
"We are currently reviewing the details of the judgement to determine whether it has any implications for the current UK VAT treatment of investment management services, and will issue further guidance shortly,” the statement added.
