Since the story broke earlier this week of a potential change in the VAT treatment of networks and Appointed Representatives, there has been a lot of confusion as to what the issues really are, who the VAT is being imposed on, and why.
Initial discussion between networks and individuals who have not seen the ruling made by HM Customs & Excise (C&E) on Whitechurch Network have led some industry officials and networks to believe the matter is simply about when VAT should be added to consumer’s bill for financial advice.
In reality, this potential change in VAT treatment is actually about the changing status and function of networks and C&E’s attempt to justify their redefinition of Appointed Representatives (ARs).
Industry sources are concerned the ruling – which suggests all network members will have to pay VAT on the services delivered by their principal – has been sparked by the change in network function from support function for a co-operative of IFAs.
Ten years ago, the IFA sector and networks were very different to the networks we see today: networks were initially set up in the late '80s to create a central administrative system within a group of equally-minded IFAs, all of which came together because they wanted clients to enjoy the benefits of collective support.
Now, however, the 'network is being redefined in part because of regulatory changes and the pressures on firms to be responsible for liabilities and potential mis-selling risks. It is this "muddying" of the network's position or role that may have sparked a VAT charge.
Rather than acting in the centre of operations for the benefit of consumers, the network now sits on the sidelines to the process and offers services support to the IFA. Now it is the IFA which now sits in the centre of operations: the IFA giving advice to consumers is now the intermediary between the network and the consumer, rather than the centralised network model seen 10 years ago.
Unfortunately, it is the pressures of regulatory change which has forced networks to change their roles and perhaps even become service companies to IFAs, rather than advice networks to consumers. But in doing so, says sources aware of Whitechurch’s position, firms have also forced a change in VAT status of the entire IFA market.
What we may now be seeing as a result is a change in stance by Customs & Excise about the treatment of services between networks, their members and who networks actually serve.
Whereas in the past the Appointed Representative was seen as a sub-contractor of the Network, it now seems Customs does not regard ARs as acting within the confines of the network, but instead acting as a direct agent of the consumer.
The network is now perceived by C&E as a support arm to the adviser, rather than a support or facilitator of consumer financial services needs.
The Appointed Representative is perceived under C&E rules as a 'principal'.
This is because when the consumer seeks financial advice and product procurement, the network is there to support the adviser. If this is correct, VAT payable on network services is likely to be unavoidable. If a network is there to help the adviser, they are offering a service to the adviser who in turn is offering a service to the client. And existing rules stipulate Value Added Tax should be payable when a service is offered.
It is because the network does not play any part in the actual purchase or procurement of products that C&E now reinterprets rules as stating VAT should be paid on a part of the commission IFAs pay to the network.
Because that part commission is held by the network for training, compliance and advice given to the adviser, VAT ought to be paid on the service or support offered to the AR.
Of course, the ‘principal’ as defined by Customs & Excise is not the same definition of ‘principal’ as is imposed by the FSA, and should not be perceived as the same. As a result, however, the changed tax status of principals is bound to cause yet more confusion within the IFA sector.
In their attempts to try and meet the changing position of regulated principals and growing liabilities of past advice, networks may have inadvertently changed the tax status of financial advisers by cutting themselves out of the purchase process. And it’s a difficult position for firms to move from, given the additional costs IFAs already face with the huge existing wave of regulatory change.
‘Most significant’ upgrade since launch
Changes happening over coming months
Had accepted British Steel business
Aimed at HNW clients and family groups
Set for 1 April 2019