HM Revenue & Customs’ decision not to exempt consultancy charging from VAT could kill off the charging method, Aviva corporate benefits head of policy John Lawson says.
Consultancy charging rules were introduced by the FSA to allow advisers to take a fee from employees’ pension pots for advice given to their employer.
Earlier today the Revenue published a statement clarifying that any adviser levying a consultancy charge will need to charge the employer VAT.
There are three ways for an adviser to levy a consultancy charge – a percentage of pension contributions, an increased basis point fund charge or a flat fee taken from members’ funds.
Lawson says most advisers who have used consultancy charging so far have adopted one of the first two methods.
He says because both investment performance and contributions vary from month to month, an employer who wants to use these consultancy charging methods would be forced to accept an open-ended VAT liability.
Lawson says: “Contributions and investment performance are variable, so they are unknowns for both the employer and the adviser. Effectively the employer will be signing up to an open-ended VAT liability.
“Because consultancy charges are usually paid on a monthly basis, the adviser would have to continually bill the employer for a variable amount of VAT.
“This really brings the future of consultancy charging into question and could kill it off completely.”
Scottish Life business development manager Fiona Tait says: “It is galling that consultancy charging has been made so difficult so late on. It was the FSA’s idea and providers built their systems to accommodate it.
“At the moment advisers are trying to replicate pre-RDR charging structures, which means a percentage charge. And if you have a percentage charge then clearly the VAT liability is open ended.
“It would be feasible to control those costs by charging a fixed fee and that seems to me the most practical way to do a consultancy charge.”
Consultancy charging has been under pressure since June last year when the FSA announced a consultancy charge is not permitted to reduce the effective value of automatic enrolment contributions to an automatic enrolment scheme below the statutory minimum.
In November, pensions minister Steve Webb launched an urgent review into the charging method and threatened to ban consultancy charging for auto-enrolment.
The DWP is expected to announce the outcome of the review later this month.