There has been no change to VAT legislation but the RDR has prompted changes to business models and potentially the way client offerings are disclosed.
HMRC produced guidance on application of VAT relating to intermediary services and the RDR. The guidance has clarified a number of areas and sets out the treatment of retail investment products within an RDR charging structure. Aifa will be following this up with a note for members aimed at covering typical scenarios that apply to advisers. I remember drafting something similar for members over 10 years ago but as the market has developed, a simple two-pager would not cover all expected outcomes.
To start with the easy bit, stand-alone advice is a taxable supply and execution-only is exempt. Next, we come to the service offering of most firms. To meet the intermediation exemption, HMRC sets out the expected steps of engagement that an adviser will have with a client. These are:
1: Gather information about the customer (fact-find).
2: Carry out research to find suitable investment options.
3: Provide the customer with reports, financial health-checks, forecasts.
4: Recommend specific investment products to the customer, including prices at which these can be arranged.
5: Act between the product provider/s and the customer with a view to arranging the sale of the retail investment products agreed with the customer.
6: And, where applicable, that is, where the customer agrees to an ongoing review service, monitor the customer’s ongoing position to ensure the products continue to meet the requirements of the customer.
Following this process, where your client agrees to the arrangement of a retail investment product (up to step 5), the service is exempt. If you can evidence that the client initially agrees but subsequently changes his/her mind no VAT will be due on any charges made to the client for your service. Record keeping is important – if the sale doesn’t go ahead and you don’t have any evidence on file to support the initial intention, VAT will be due on the charge made to the client for the work undertaken.
As ongoing service (step 6) and associated costs are usually agreed at outset, this too should be an exempt supply.
There are exceptions to the rules. As an example, discretionary investment management attracts VAT and so do any related services, such as introducing a client to a DIM. Portfolio management raises even more complicated issues that we are working on.
Aifa members should look out for our more detailed paper covering the more difficult scenarios coming soon.
Linda Smith is senior technical analyst at Aifa