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Categories:Advisers,Regulation

HMRC rethink on VAT liability for advisers

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HM Revenue & Customs has changed its stance on VAT under adviser-charging, saying liability will be based on the intention of the service when advice is originally arranged.

Tisa director of policy Malcolm Small says this will render the majority of advice situations exempt from VAT, with the exception of a client report produced with no intention to sell a product or service.

In August 2010, HMRC and the Association of British Insurers published guidance reiterating that VAT is payable on advice but not on product sales. It said if advice leads to a product sale, then the adviser must determine which is the predominant service.

But following a meeting last week with HMRC senior policy adviser David Coppins and representatives from the FSA, the Tax Incentivised Savings Association, Aifa and the Investment Management Association, HMRC has moved away from this position.

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. If this is not the intention, then the supply would be advice and therefore taxable.”

HMRC is due to publish draft guidance on VAT next month.

Small says: “It is a change from the previous position, which was looking at what the predominant service was. It is looking at the intention at the outset. We think this is going to be a lot clearer and a lot simpler.”

Aifa director general Stephen Gay (pictured) says: “We have been particularly concerned about trail and where advice is provided on trail commission whether or not that would be VAT-able. The tone of the conversation was about what the intention was at the time that arrangement was set up in the first place. This moves things in the right direction.”

IMA head of tax Stephen Lynam says there has been a lot of scaremongering over the VAT issue but that HMRC has said it will not use the retail distribution review as an excuse to take a more aggressive approach in pursuing VAT from advisers.

HMRC says it is working to produce draft guidance on VAT and adviser-charging in late October. This will be followed by industry consultation, with full guidance due to be published by “early 2012”.

Paladin Financial Services managing director Tim Purdon says: “I find this decision reassuring but I am disappointed it was not arrived at sooner as it should have formed part of the initial planning for the RDR.”

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Readers' comments (10)

  • Well that's a bit of progress anyway. Seems like the sales part of the industry won't have to charge VAT, whereas the New Model Team will be 20% more expensive than everybody else. Funny old world.

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  • The August 2010 guidance, published by the ABI, introduced the concept of 'predominant service' which was new, and effectively a change in the law. This was immediately questioned by tax experts. Basically it turns out to be a mistake by the ABI since HMRC intend no change in law.

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  • Right, that's that sorted...

    now can we all please resist the temptation to poke this issue with a stick and instead walk very quietly away and leave it to sleep peacefully?

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  • Very good news now let's get clarity on legacy commission.

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  • If 98% of sales/advice wont attract vat why not just have no vat at all - rather than encouraging sales of products and discouraging pure advice ?

    do they really collect anything worthwhile ?

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  • "Walk very quietly away " - don't make me laugh, in a year or so we will see this raised as it still does not make clear whether if you are a sole trader in a network to whom fees become payable before being distributed to the adviser for his/her split, whether the network will have to include VAT on invoices raised by individual network practice members.

    As financial planning inevitably involves product purchase for the majority of savings and protection plans, this is the pre-dominant service and who produces reports with no firm recommendations to invest, save or protect using market products ?

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  • So to be VAT exempt the purpose of the client engagement must be to arrange a transaction. This is not financial planning but a product sale. Financial planning often involves advice on a transaction but this is the not the aim of the service. I trust that those arguing for VAT exemption will make this clear in their client poropsal.

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  • The first point of contact is to discuss options and seek advice thereafter to produce a solution to the client need. The initial intention is all advice, then possibly a "sale" of service - VAT is then chargable on all ongoing work, worried now!!!

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  • Surely, if you are a directly authorised sole trader or even part of a small firm, you are never going to give £73,000 of ADVICE in a 12 month period, so you don't need to be VAT registered. Problem solved.

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  • This is an unhelpful and confusing article. The two approaches - looking at the original intention and looking at the pre-dominant service - are not necessarily mutually exclusive. If the original intention was to carry out a general financial healthcheck and introduce the client to a VAT-exempt retail financial product, the IFA would still have to consider which of these services was predominant.
    The 'pre-dominance test' comes from a decision of the House of Lords in the case of Card Protection Plan v. Customs & Excise [2001] UKHL 4. HMRC, TISA and ABI cannot reverse a decision of the House of Lords.

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