MiFID II comes into force from 3 January 2018, and introduces a new model (replacing the current commission sharing arrangements) under which research provided by a third party to an investment firm must be paid for. Therefore, firms can no longer be provided with research without additional charges 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.


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 implementation of MiFID II, according to a number of sources, draft HMRC guidance has stated that since a separate charge must be made for research post 3 January 2018, it cannot generally be regarded as an ancillary part of a wider supply and therefore 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 (“SIF”) (which falls within the VAT exemption for fund management services) in line with the GfBK decision (Case C 275/11). This case dealt with the question of whether services provided to a SIF by an outsourced investment adviser qualify for the SIF management exemption from VAT. The decision extends the scope of the exemption so that a single stand-alone service performing the specific and essential functions of the management of a SIF may qualify for exemption, which moves away from the need for some overall package of services.

As a result, 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 opposed to periodic or general research) and where the fund qualifies as a SIF.


HMRC are expected to produce manuals/guidance by the end of this year to give effect and provide clarification on the VAT treatment of research.

To read the full details of the GfBK decision, please click here.

For more information, and any guidance or advice on the impact of the MiFID II rules on research for your firm, Cleveland & Co, your External in-house counsel, are here to help.