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Does MIFID end the VAT exemption for research?

05 December 2017

From 3 January 2018, research providers in the financial services sector must separate charges relating to execution and research services. All affected parties (both buy and sell side) need to consider the VAT impact of this ‘unbundling’ of fees.


MIFID II is an EU wide legislative framework introduced to improve the functioning of financial markets, to make them more resilient and to improve transparency in terms of client costs and charges. 

Among other things, MIFID II requires research providers (ie investment firms, brokers and independent research houses) to make separately identifiable charges for research costs. This is aimed at increasing investor protection and bringing greater transparency to the asset management industry.

The rules are effective from 3 January 2018.

Current VAT treatment

Research services when separately supplied are typically subject to VAT. However, HMRC has historically allowed research providers to treat their research services as exempt from VAT – provided that the services met specific conditions and are within ‘commission sharing agreement’ (CSA).

The criteria includes that the research provider’s intention is to secure execution business, the services were sales oriented; and the research information provided is specific to the execution of potential transactions that the provider is capable of seeing through.

The basis for the VAT exempt treatment is that the payment of commission is seen as consideration for a financial intermediary service whether or not finally concluded by the research provider.

As such, research providers were able to treat the commission payments for research services under the CSA as exempt from VAT.

As MIFID II requires separation of research and execution services, it appears unlikely that research providers will be able to continue to rely on CSA to maintain VAT exemption.

VAT treatment going forward

We are expecting HMRC to release formal guidance concerning the VAT impact of MIFID II, hopefully before the end of this year. Although there has been some informal consultation with industry bodies, this will give affected businesses very little time to make any changes before the MFID II rules are effective.

Based on the VAT rules, we believe research providers will – in most cases - have little choice but to charge VAT on research services. In addition, where research services are bought in from suppliers outside of the UK, the recipients of those services will need to consider whether they will need to account for VAT under the reverse charge mechanism.

The one possible exception is where the research services are supplied specifically in relation to the management of a ‘special investment fund’ (SIF) such as an OEIC, AUT and ITC etc. In such a case, it is potentially arguable that the research services are specific and essential to the management of the SIF and, therefore, should remain VAT exempt.

While the recipient of the services (eg a fund manager of a SIF) will know what the research is being used for, the position may not be so clear cut for the services provider. In fact, trying to determine the underlying beneficiary of the research services will present significant practical difficulties.

For example, the research provider will need to establish who the recipient of its services is and how the services will be used by the recipient: will it be used wholly in relation to the management of a SIF or will it be used in relation to the management of both a SIF and other (non SIF) funds? Depending on the exact circumstances, the VAT treatment will differ.

Practical considerations

Service providers will inevitably need to consider the contractual arrangements between themselves and the persons to whom they provide the research. Not only must they have regard to the deliverables and how they will be used but they also need to consider the pricing and invoicing: can they add VAT to their charges and to whom do they need to issue a VAT invoice? And if the research can be treated as VAT exempt, they will need to consider what that means for their input VAT recovery.

Recipients of the services will need first to consider whether to absorb the charges for research services and pay them through their own P&L or whether to charge the costs on to the underlying client (through the Research Payment Account).

If the former, the recipient (such as a fund manager) will need to consider the extent to which it can recover the VAT (if at all). If it is on-charged, then the fund manager must consider its own VAT obligations when it passes down the costs to its own clients (ie funds). More specifically, will the charge represent a separate supply for VAT purposes or does it simply form part of the charging for the overall fund management service? Once again, there are further complexities where some of the funds are SIFs whilst others are not.

Finally, while the main focus, understandably, will be to ensure the VAT is right for the future, all parties should take the opportunity to examine and review the historic treatment of research services. Has VAT always been charged in the past? If so, and depending on circumstances, there may be an argument that any commission for research services should have been VAT exempt. Businesses can still rely on HMRC’s current position to go back four years to correct any errors.

Action points

Research providers and recipients need to determine the impact of the MIFID II rules on the VAT treatment of research services in the context of their business. 

Some of the immediate things to think about are:

  • Sell-side (research providers):
    • Review current arrangements and the VAT treatment applied to research services provided under a CSAs
    • Consider the potential VAT treatment of the supplies going forward, for example, should research services provided to SIFs be carved out as a separate supply? What about the impact on pricing of research services?
    • Establish processes for raising VAT invoices, and
    • Assess the input tax recovery position (under existing partial exemption method where relevant).


  • Buy side (research recipients)
    • Identify how research will be used and whether it will be used for the management of SIFs
    • Establish the VAT liability of the supplies from overseas suppliers and the reverse charge implications
    • Consider whether any VAT charged on the research services should be absorbed through the P&L or whether to pass it on to the underlying client/fund, and
    • Assess the input tax recovery position (under existing partial exemption method where relevant).

Your next steps

For help and advice on how MIFID II changes will affect your VAT profile, please contact your usual VAT adviser or one of VAT specialists listed overleaf.