HMRC issues long-awaited VAT guidance on outsourced fund management services

Bryn Reynolds, tax expert, and Elizabeth Budd, financial services regulatory expert, of Pinsent Masons were commenting following the publication of the new guidance on 10 September.

HMRC’s guidelines for compliance set out HMRC’s recommend approach and offer HMRC’s view on complex, widely misunderstood or novel risks that can occur across tax regimes.

The fund management exemption has been subject to significant litigation over the years and HMRC’s proposed interpretation in 2025 was widely reported to have been the subject of letters from industry bodies warning about HMRC’s plans.

Reynolds said: “The new guidelines provide a useful insight into HMRC’s position. Its position is considerably more relaxed than the proposals which concerned businesses. The practical insights as to how HMRC sees the broad framework of single and multiple supplies operating in the context of fund management contracts are valuable.”

According to HMRC, outsourced services supplied to a fund manager do not automatically qualify for exemption simply because they are used in the provision of exempt fund management services. To benefit from the exemption, the fund must be a qualifying fund and
“the services, viewed broadly, form a distinct whole that is specified to and essential for the management of that fund”.

HMRC also stresses that services which are merely physical or technical in nature will not qualify.

Budd said: “The guidance is relevant for modern outsourcing models, where fund managers rely on third-party providers for investment management, administration, compliance, reporting, technology and operational services. Fund managers and funds may want to revisit their contracts and current VAT treatments in light of these new guidelines. Contracts can apportion any potential VAT liability in different ways depending on whether fee arrangements are VAT-inclusive or exclusive.”

HMRC notes that these arrangements are often governed by master services agreements (MSAs) supported by more detailed fund-specific schedules. The guidance seeks to explain how the VAT treatment should be determined in these structures.

The guidance includes discussion on whether services supplied under an MSA constitute a single composite supply, or a number of separate supplies.

HMRC states that the analysis should be based on the commercial and economic reality of the arrangement, rather than simply its contractual form. The question is whether the services together form “a single indivisible supply which it would be artificial to split”.

Reynolds said: “This distinction is critical because different elements of a service package may attract different VAT treatments. HMRC’s position is clear that apportionment of a single supply is not possible so establishing whether a single supply or multiple supplies in respect of a number of different funds are made is crucial and requires specialist VAT advice.”