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Trading Platforms

 

Introduction

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Trading platforms are systems used by banks, brokers and other financial institutions to facilitate the trading of financial or physical products such as Bonds, Commodities, Shares, Currencies etc.  The fees

 

charged for the provision of these platforms can be Exempt from VAT on the basis that the service falls within the Financial Intermediaries Exemption item 5,  Group 5,  Schedule 9 of the VAT ACT 1994 or

 

Taxable if the service does not meet the conditions stipulated by HMRC to warrant exemption. 

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HMRC's view on dealer systems / trading platforms per VAT Notice 701 /49 is as follows:

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"If you operate a dealing system that allows a user to insert a bid and offer quotes for securities, another user to insert an acceptance and for the system to match and sell deals, your supply of the

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dealing system is exempt, but only where you run that system". 

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Matching - Exempt

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The key point here is the platform has direct autonomous involvement in the matching of counter-parties and allows:

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• Platform users / members to offer or insert bids for exempt financial products (such as shares and currencies) at specified prices and

• Platform users / members to accept offers available on the platform (or otherwise insert counter-offers and bids).

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The service of matching of bids and offers by a platform provider/operator in order to bring about a trade in securities, debt and currencies is Exempt under item 5, Group 5, Schedule 9 VATA 94.

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Messaging / Market Data Services - Taxable

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Systems that :

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• Allow users to insert bids offers and others to view and accept on a transparent basis

• Send messages to verify the trade

• Have no direct involvement in matching anonymous counter-parties

• Allow market makers to provide and respond to requests for prices from clients

• Stream market prices and data RFQ, RFS

• Provide data and information  

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The above types of services where no matching occurs or the system just streams data to subscribers are Standard Rated.

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 Trading Costs 

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• Platform Access / Gateway type services where platform only offers matching services = Exempt

• Platform Access / Gateway type services where platform offers matching and a range of other services = Standard Rated

• Platform Membership / Subscription Fees = Standard rated

• Sale of Platform Technology or Software = Standard Rated

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Investment Platforms

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Introduction

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Investment platform providers supply online-based services that are designed to transact, safeguard and administer financial investments online.

 

Some platforms provide services directly to investors whilst others can only be accessed via an adviser or other intermediary. Platforms offer a single view of the client’s investment portfolio and provide a convenient channel through which investments can be aggregated; i.e. the bulk execution of equity orders when the intent is to buy and sell the same equity for multiple clients. This enables investments to be transacted and administered more efficiently.

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Activities usually undertaken by investment platforms include:

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• Providing access to a wide variety of retail investment products, including collective investment schemes, personal pension schemes, ISAs and other wrapper products, stocks, shares, gilts and insurance funds

• Receiving, transmitting and executing orders for transacting in those investments on behalf of clients,

• The safekeeping and administration of clients’ assets,

• Acting as nominee (and therefore legal owner) of the securities that are held in trust for the individual investor who remains the beneficial owner

• For product providers, platforms provide a means of distributing their products.

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Platform Fees usually charged by investment platform providers for such services are Exempt from VAT under items 5 and 6 of Schedule 9, Group 5 of VATA 1994, being services related to transactions in securities.

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Note: Other services offered such as Portfolio Management,  The provision of Market Data, Research, Information etc will Standard Rated.

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Crowdfunding Platforms

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Introduction

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Crowdfunding is the practice of funding a project or new business venture through a collection of small contributions from a large number of people (the crowd) over the internet.

The project owner (entrepreneur) will normally use an online platform which specialises in crowdfunding to market and advertise their project to the general public in the hope of generating interest and raising funds.

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There are two crowdfunding models namely the Non Financial and Financial Reward Models.

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The Non-Financial Return Model - Reward and Donation

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• Reward Model - The contributor, in return for providing a monetary contribution to the project or venture will receive goods or services (non-monetary reward).  VAT Treatment - Where a contributor receives goods or services that have an intrinsic value (e.g. clothing, tickets, dvd) in exchange for support given, there is a supply for VAT purposes. The VAT treatment will follow the liability of the goods or services provided.

• Donation (No reward model) - The contributor makes a monetary contribution to the project or venture and expects nothing in return.  VAT Treatment - Where a contributor freely makes a contribution where they expect and receive nothing in return, the contribution is treated as a donation and is not liable to VAT. The position is the same where all that the funder receives is something of symbolic value. For example, an acknowledgement such as a mention in a programme or something similar.

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The Financial Return Model - Investment and Loan Based

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• Crowdfunding Investment Based Model - In exchange for their investment, the contributor receives financial remuneration in the form of equity securities (such as shares) or debt securities (such as bonds or debentures) issued by the business who launched the funding campaign.  VAT Treatment - Following the decision of the ECJ in Kreztechnik, the issue of securities by the business to the contributor, will not be a supply for VAT purposes provided the purpose of the issue is to raise finance.  Where there is a sale, transfer of or trading in existing shares and this is done in furtherance of a course of business, then this is treated as exempt under item 6 Group 5 schedule 9 VATA 94.  Where the contributor has received financial remuneration in the form of shares issued by the business, any dividends paid to the contributor will be outside the scope of VAT.  Where the contributor has received financial remuneration in the form of a debt security such as a bond or debenture issued by the business, interest received by the contributor as holder of the security will be exempt under item 2 Group 5 schedule 9 VATA 94.  Where a fixed term debt security such as a bond is held to its maturity date the repayment received on redemption will be outside the scope of VAT.

• Crowdfunding Loan Based Model -  Otherwise known as peer to peer lending, the contributor will lend money to a business/entrepreneur they select on the crowdfunding platform in return for interest payments and a repayment of capital over time.  VAT Treatment - The contributor is granting credit in the form of a loan and in return will receive interest. The value of the supply is the gross interest or other sum received but not the repayment of the loan itself. The interest received on the money loaned is consideration for an exempt supply of credit.

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Crowdfunding Platform Services

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Online crowdfunding platforms provide an opportunity for entrepreneurs to market or pitch their project to the general public. Some platforms are generalists and offer different types of projects and crowdfunding, others focus on specific types of project e.g. technology or focus on one type of crowdfunding e.g. an equity platform.

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Crowdfunding platforms providers operate different fee structures for their services. Fees can include commission on funds raised, yearly or monthly subscription fees, flat fees, arrangement fees, administration fees and legal costs.

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Some platforms are purely a landing page that brings entrepreneurs and funders/investors together. Others have a more active role and the platform provider acts as the central counter-party in the funding arrangement between the funder / investor and entrepreneur.

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VAT Treatment -  

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As there can be fundamental differences in the services provided by many crowdfunding platform providers, the VAT treatment will depend on the individual facts of the crowdfunding arrangement and the precise nature and characteristic of the platforms service.

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If for example, the platform provider acts in an intermediary capacity between the project owner and the investors/contributors in arranging a financial transaction, the service will also be exempt if it falls within item 5 sch 9 VATA 94.

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If however the platform provider is simply providing the technology for the project holder to advertise and market their project and is not involved in the funding arrangements between the project owner and the funder, the service will be taxable as it is purely technical in nature.

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-Contains public sector information licensed under the Open Government Licence v3.0.

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