The Personal Finance Society's paper on VAT and Adviser Charging contains a "significant error" and must be "urgently revised", warns a pension expert.
Steve Patterson [pictured], managing director of Intelligent Pensions, said the problem lies in VAT charging on on-going services, such as a client paying a fee for an adviser's recommendation but taking no further action.
PFS guidance said general financial advice is taxable and intermediation on product sales is VAT exempt. An adviser's annual charge is likely to be a VAT-able supply if the client does not buy a product except for cases where an investor cancelled purchase.
"This seems nonsensical and quite impractical to implement" said Steve Patterson.
He added: "If an adviser's annual review report recommends changes to the holdings, is the adviser supposed to go back and ask the client to pay the VAT later if the client elects not to follow the rebalancing recommendations? How long is the adviser supposed to wait for the client to decide whether to follow the rebalancing advice or not, a week, a month, two months? It's just daft."
He said the PFS interpretation would present a potential risk to investors as many would feel compelled to request a change in their financial affairs to avoid paying VAT, even if no changes were recommended in their annual review.
Patterson also believes the guidance is at odds with the decision in the recent Bloomsbury Financial Planning case. HMRC repaid the firm £259,000 after charging VAT on an introductory service for clients to fund managers.
In response, PFS contacted Intelligent Pensions saying:
"The paper you refer to was drafted following lengthy discussions with HMRC. It does not represent the views of the PFS and is not our guide but the HMRC's interpretation of their own rules. They approved the document in full before its publication. Whilst I am sure your observations may have merit, the fact remains this is the law and as such our role here has been to provide clarity rather than to express an opinion."
"While we believe the guidance needs to be changed with clarification on the issue of ancillary services in the form of pre-agreed portfolio reviews, we do acknowledge the PFS guidance paper is only expressing the views of HMRC. As such, it is HMRC that urgently needs to provide clarity on this issue in the light of the Bloomsbury case."
Achievements, charity work and other happy snippets
Laughable excuses for persisting
Spent 56 years at Schroders
Warns on profits