Last week, HM Revenue & Customs announced it has changed its stance on determining when VAT is applicable when paying for financial advice, saying liability will be based on the intention of the service rather than the outcome.
Previous guidance stated VAT would be payable on advice but not on product sales or implementation, sparking confusion from IFAs as to where the line is drawn between the two services.
Although HMRC’s new position clarifies some of the previous issues, the question now is whether the new guidance contradicts the intention of the retail
The FSA says the
RDR’s aim is “to address the potential for adviser remuneration to distort consumer outcomes” and “to have charging structures based on the level of service advisers provide, rather than the particular product they recommend”.
HMRC’s VAT guidance seems to encourage the opposite by saying advice is exempt from VAT where the intention of the provision of advice is to end in the sale of a product.
An HMRC spokesman says: “The VAT liability of the process is governed by the intention. If the intention of the agreement between the customer and the adviser is to enter a process leading to the arrangement of an exempt transaction, this is VAT-exempt intermediation.”
This seems to set HMRC’s VAT rules against one of the FSA’s central intentions for the RDR.
Kleinwort Benson private client tax specialist Graeme Stenson says: “Making sure advisers’ intentions at least are clear is a good move. But I think that unless IFAs accept that what they are doing is mainly advice and is VAT-able, deciding on the outcome at the outset undermines the RDR’s aim of stamping out product-led advice.”
The fact advisers will have to decide upon and articulate the outcome of a transaction before the client meeting has taken place is something that Plan Money director Peter Chadborn regards as contravening the RDR.
He says: “To move away from a product-led advice scenario, adviser models are having to incorporate fees for pure advice to prove non-bias. Yet it is impossible upon first engagement with clients to know if any part of the advice will result in a product.”
Similarly, Baker Tilly tax partner Ian Carpenter believes HMRC’s guidance could pose a threat to RDR objectives. He says: “There is a risk of distortion in that people will seek to expressly opt for product-led advice to avoid a perceived additional VAT charge, rather than because it is what they actually want.”
The additional cost of VAT to the cost of advice is not insignificant at a time when many IFAs are having to wean clients off the idea that advice is not free in the first place.
Some advisers say they are concerned that the addition of the 20 per cent VAT charge will put some potential clients off independent advice entirely – an outcome that also runs counter to the FSA’s stated intention for the RDR.
Informed Choice managing director Martin Bamford says: “It seems a big leap to make from seeing advice as free under commission to not only having advice charged for explicitly but also applying VAT at the same time. Maybe people will accept VAT two or three years after the RDR but it could be too much all in one go at the start.”
Stenson agrees the public could be discouraged from seeking advice as a result of unfavourable VAT liability. He says: “Paying VAT rubs salt in sore wounds. Furthermore, there is no tax relief on the total charge as there would be if the advice was wrapped in a product.”
The new guidance also does nothing to ease the administrative burden on IFAs as advisers will still have to keep records of all business that is VAT-exempt and document why.
Carpenter says: “I do not think this guidance will remove the administrative issues IFAs would have had with separating the engagements of product and advice.”
Although Bamford welcomes the statement from HMRC and says it brings more clarity to the overlap of advice and implementation, Carpenter says there still a lot of room for confusion.
He believes advisers may have to familiarise themselves with more legislation to get a better understanding where the line between implementation and advice lies.
He says: “There is a clear rationale of rulings at UK and EU level focusing on what constitutes an intermediary financial service. This is likely to be a better guide than intuition in the absence of more concrete guidance from HMRC.”
Bamford agrees that seeking external help when separating product and advice is the best method. Bamford says: “We go to our accountant. I am not sure you would get a much clearer response if you went to HMRC, so seeking professional tax advice is the right move.”
Despite HMRC’s change of heart, the VAT liability will remain a bone of contention for advisers. Chadborn says: “Many IFA firms are still struggling with the concept of adviser-charging, so the VAT issue is another aspect to muddy the waters.”