MiFID II, which comes into force from 3 January 2018, introduces (amongst a whole raft of other measures) a new model under which research provided by a third party to an investment firm must be paid for, and not, as has often been the case, provided without additional charge as part of another service (such as execution or investment management). Under the new “hard dollar” model the research must be paid out of either the firm’s own resources or a research payment account funded by a specific charge to the client and controlled by the investment firm. The changes represent an aim to achieve greater transparency and reduce conflicts of interests.

Updated VAT Treatment

The supply of research is a standard rated supply for VAT purposes. However, historically where research has been bundled together as an ancillary part of an exempt supply (such as the supply of intermediary services in the execution of a trade or where it is provided as part of the management of special investment funds) it has generally been treated as part of that exempt supply.

Following the MiFID II changes, draft HMRC guidance has stated that since a separate charge must be made for research it cannot generally be regarded as an ancillary part of a wider supply and VAT must be charged. However, HMRC accept that the supply of research (such as recommendations to buy or sell assets) may be VAT exempt if it is treated as part of the management of special investment funds (which is an exempt VAT supply) in line with the GfBK decision (Case C 275/11). In effect, in order to be VAT exempt the specific supply of research must be intrinsically connected to the activity that is characteristic of an investment fund management service (i.e. it involves the constant monitoring of the fund’s assets as distinct from periodic or general research) and where the fund must be a special investment fund such as a UK authorised fund.

Changes to the HMRC manuals will be introduced shortly to give effect to this clarification.