The Personal Finance Society (PFS), in conjunction with consultants Engage Partnership and following lengthy discussions with HMRC, has produced a paper outlining the applicability of value added tax (VAT) on a number of advice scenarios, including ongoing services.
The PFS's latest Professional Directions paper clarifies which services offered by a financial adviser are VAT-able, following confusion about when the tax would apply.
It confirms that whether a service is liable for VAT or not depends on the actions of the adviser: if at any point the adviser has acted between a product provider and customer with a view to arranging a product sale, the adviser charge will be VAT exempt, regardless of whether a sale is finalised.
Put simply, general financial advice is taxable; intermediation is exempt. Intermediation, if transacted through a platform, would qualify for VAT exemption.
Four adviser scenarios to determine VAT liability
The PFS has cited four examples to demonstrate its guidance...
An individual has approached a financial adviser to discuss his retirement planning needs. Subject to the findings in relation to any potential shortfall, the individual agrees that the adviser should make a recommendation on how any funding shortfall should be met. A fixed fee is specified for the work.
OUTCOME A: The adviser gathers client information, identifies a shortfall but makes no product-specific recommendation on how this should be met. At this stage, the adviser has not made contact with any product providers. The client receives the report, pays the fee but takes no action. Likely position: VAT charged.
OUTCOME B: The adviser gathers client information, agrees retirement objectives and carries out research to identify the most suitable financial products to meet the client's objectives. As part of the recommendation, the adviser contacts the product providers chosen by email or telephone to obtain personal illustrations, which are then supplied by the providers. The adviser recommends a retail investment product(s) in a personal report or suitability letter that meets regulatory requirements. The client receives the recommendation, pays the fee but decides to take no further action. Likely VAT position: VAT exempt.
OUTCOME C: The client receives the recommendation in the personal client report or suitability letter and agrees to act upon the advice given. The adviser assists the customer with the completion and submission of the application forms. The client pays a fee for the service provided. Likely VAT position: VAT exempt.
OUTCOME D: The adviser acts as in outcome (c) and the sale is transacted via a platform. Likely VAT position: VAT exempt.
An individual asks an adviser to carry out an analysis of their estate to determine the inheritance tax liability and to recommend ways it could be mitigated or provided for financially.
OUTCOME A: The analysis is carried out by the adviser and an inheritance tax liability is identified. A client report is produced and refers to generic solutions that are based on the use of financial products (life assurance investment bonds) and trusts. The client receives the report and pays the fee. No specific recommendation for a RIP is given and none are purchased. Likely VAT position: VAT charged.
OUTCOME B: The analysis is carried out and the adviser designs a solution based on the use of life assurance bonds that will be written under trust. The adviser selects the product and asks the product provider to send him the written investment bond key features and personal illustrations.
He presents his suitability report to the client with the illustrations. The client receives the report and personal recommendations and agrees to proceed. The adviser arranges the product for the client. Likely VAT position: VAT exempt.
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