VAT of worms
HMRC is urging IFAs to help draw up clear tax guidelines as the issue of VAT liability for financial advice could get a whole lot murkier under the RDR. Rachael Adams reports
Earlier this month, the Tax Incentivised Savings Association brought the issue of VAT liability for financial advice back into the spotlight.
The service of arranging life, pensions and investment products and mortgages is exempt from VAT but offering ongoing financial advice is not.
If the customer wants advice and buys a product, IFAs must establish which element of the service is predominant.
A lack of clarity over how the VAT issue will be viewed with regard to the changes prompted by the retail distribution review has led HM Revenue and Customs to call for the help of independent advisers in producing guidance.
At a briefing for IFAs organised by Tisa, a HMRC official criticised the FSA for adding to confusion surrounding the VAT issue by describing platforms as providing administration services in its last platform consultation.
HMRC deductions and financial services team senior policy adviser David Coppins says platforms are clearly based on charging for transactions and so should be exempt from VAT.
Legal & General RDR and commercial director Danny Wynn says this is “an unhelpful diversion from the real issue” of how advisers will ensure they are charging VAT when required.
He says IFAs must take HMRC up on its offer. “I would strongly urge the IFA community to engage,” he says. “Even now, there are a number of firms in the industry that have experienced real difficulties because they have got their VAT classification wrong.”
Wynn believes this risk is only going to intensify after the RDR and working with the HMRC to produce guidance may alleviate it.
Syndaxi Financial Planning director Robert Reid thinks HMRC may be trying to clarify previous guidance from the Association of British Insurers and HMRC last August.
He says: “HMRC wants to talk to IFAs because it is conscious there has been some nonsense talked in the past by professional bodies following their own agendas. We definitely need some clarification.”
However, clarification is just the first step in a head-ache-inducing process.
Reid says: “None of the back-office systems will cope with the administrative burden of separating out what is advice from what is predominantly a product sale.”
Institute of Financial Planning chief executive Nick Cann agrees that distinguishing between advice and administration will pose the largest problem for advisers.
“That is the grey area and IFAs need to determine what the main thrust of their service is. Most of them will be providing financial planning that may or may not lead to a sale,” he says.
Reid agrees: “If you do financial planning you are going to struggle to explain that something was a product-led transaction from the start. If that is the predominant activity, then fine, but in many cases it will not be and so will not qualify for VAT relief.”
However, Wynn does not think that separating propositions will cause problems.
He says: “It is overcomplicating matters. Have one charge for advice and one for intermediating. For example, there could be a charge of £500 plus VAT for a financial plan and to execute it there could be a 1 per cent charge that is not VAT-able. It makes things clear for everyone.”
Wynn says adding an extra 20 per cent charge to a service people thought they were getting for free will act as a disincentive to people seeking advice.
He says: “It is an unintended consequence. Adding a tax charge perhaps undermines one of the core objectives in getting people to engage with the industry.”
Cann disagrees, saying: “Many will attest that the value in the advice is the planning and not the product. Advisers should concentrate on what it is they are offering.”
Advisers will have to articulate their propositions more clearly under the RDR, something Reid believes will make them more capable of justifying the VAT charge. He says: “IFAs are generally bad at making the case for advice. This is going to make them sharpen their pencils.”