MiFID II: Loss of VAT exemption for research?

MiFID II went live on 3 January 2018. In scope, firms will have considered the impact of the regulatory changes being introduced, but may not be aware of the VAT implications of MiFID II in respect of the provision of research.

Firms have now unbundled (or are in the process of unbundling) research and execution fees and charges separately for each component. Whilst in most cases the provision of execution services remains VAT exempt, the provision of research services is likely to be subject to VAT.

Consequences of MiFID II
MiFID II does not itself change the VAT treatment and liability of research services. They have always been subject to VAT at the standard rate, but the unbundling of research and execution fees means that there will now be a separate ‘supply’ of research which cannot be considered to be part of an exempt supply of financial intermediary services.

As a consequence of the changes, research providers need to review contracts to ensure that they are VAT compliant going forward. Amongst other things, they need to consider whether their fees may be exclusive or inclusive of VAT i.e. are they able to charge VAT in addition to the agreed fees or do they need to extract the VAT due from their charges.

How this works in practice
If VAT can be charged in addition to the fees, the recipient of the research needs to consider whether and to what extent they may recover the VAT charged.  This largely depends on how research is used. If it is consumed in order to provide an exempt service (such as management of a special investment fund), an additional VAT charge would, generally speaking, be irrecoverable.

Conversely, if the research is consumed solely to make or provide taxable supplies/services (including outside the scope with recovery supplies), the VAT incurred could be fully recoverable.
If used to make/supply both taxable and exempt services, the VAT would be partly recoverable in accordance with the recipient’s partial exemption method.

Further guidance and advice
It is understood that HM Revenue & Customs are expected to publish guidance on this matter shortly, but given the implementation of MiFID II, affected firms should consider the implications now, if they have not already done so.

If you would like to discuss the VAT implications of MiFID II on your business, please get in touch with Moore financial services team, or already a client, please speak to your existing VAT contact.