Martin Sharratt, head of VAT at accountant and investment manager Smith & Williamson,
Implementation of the Retail Distribution Review ("RDR") proposals is just under a year away and the debate on the VAT impact of the new rules shows no sign of cooling down.
Senior policy advisers at HMRC, having initially been taken aback by all the fuss, have been meeting with trade bodies and tax advisers to work through the concerns, and have now released draft guidance, inviting comments by 31 December.
The issue, in a nutshell, is that charges for arranging financial transactions are generally exempt, but financial or investment advice is subject to VAT. This is not changing, but RDR means that the way in which IFAs get paid for their work will be very different from 2013.
Product providers will no longer be allowed to pay an adviser for acting as an intermediary in bringing in his clients' business. The IFA will instead need to charge the client for his services (this will also affect fund platforms handling these transactions and charges).
VAT advisers hastened to point out that the nature of the adviser's services was not necessarily changing, and that there was still scope for exempting fees. Until now, however, it was unclear where HMRC would draw the line; and, while the new guidance is helpful, there are many variables in play and the position is still not entirely clear.
HMRC bending over backwards?
Bearing in mind that the VAT rules themselves are not changing (and that HMRC has no power to change them) it could be said that the draft guidance goes as far as anyone could reasonably have asked.
The guidance recognises that the adviser/client relationship can involve several stages, starting with information-gathering, research and investment recommendations, followed by implementation and then a period of ongoing monitoring and ‘rebalancing' of the portfolio.
HMRC confirm in the next paragraph that all of these services "will be exempt intermediation". The assumption here is that the whole process is intended to lead to the adviser arranging for the client to purchase securities or insurance products and that the ongoing relationship is all about adjusting the client's portfolio by arranging further transactions of that kind.
Some IFAs may take the view that this covers most, if not all, that they do for their clients and, even if that is not 100% certain, it will be enough in many cases to keep their taxable turnover below the VAT registration threshold (currently £73,000 per annum). However, VAT is not as simple as that.
Ongoing advice - still not perfectly clear
The comments on the following page of the guidance, under the heading ‘other services', should sound a note of caution. If the adviser's client documentation, or the charging structure, suggests that there is a separate service of investment management or advice, then charges for those services are subject to VAT.
This creates particular difficulties at the ‘ongoing advice' stage. Many advisers will be looking to charge an annual fee based on a percentage of the value of the client's funds, and their marketing material will, understandably, emphasise the benefits of their expert advice.
While the basis of charging should not, of itself, determine the VAT treatment, this does start to look like an investment management service.
In tax law, any exempting provision must be interpreted narrowly - and in the case of VAT, the Government has little room for manoeuvre because the rules are fixed by European directives. Any further clarification on these points, therefore, is likely to suggest that VAT must be charged.
What should advisers do?
The VAT position may become clearer over time, but the questions will not go away altogether; IFAs will have to learn to live with them.
We now know that the services of most advisers will not all be subject to VAT. The challenge now, both for those who are VAT registered and those who are not, is to identify which charges are likely to be taxable and which exempt.
If some of the adviser's services include elements of advice or investment management (and for most advisers this will probably be the case) then it would be worth reviewing the charging structure, so that fees for taxable services are clearly identified and separately charged.
Given the uncertainty over VAT on ‘ongoing advice', for example, it might be helpful to split the annual charge into a ‘rebalancing fee' and a separate ‘management fee'. If the different services can be teased apart in this way, the rebalancing service would be exempt while the management fee would be standard-rated.
Of course, if the adviser now has to charge VAT he will at least be entitled to recover some of the VAT on his costs, but that entitlement is subject to another set of VAT rules and causes quite a few headaches in its own right.
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