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Chris Davies: VAT and the RDR

Recent Tisa presentations on VAT and adviser charging clarified one thing; there is still plenty of obfuscation and differing views in the market as to how the implementation of VAT will play out.

Yet the HMRC guidance simply states that nothing has changed, the law is the law and any consideration (fee) should be justified and assessed as intermediation or not. If not then it is VAT-able.

Let’s clarify the facts:

1.   The guidance must clearly reflect the legislation and legal precedents applying.

2.   An adviser acts as agent to the client and must act in the clients best interest. This then complies in full with the law of agency.

3.   Any guidance must be practical and be subject to a clear test.

4.   The VAT treatment of supply must be determined up front before work is engaged on.

Advice process:

We then need to apply the 6 advisory steps, which see the advice process in action:

1.   Fact finding: Gathering customer information

2.   Research: Suitability of investment options

3.   Report: Financial plan including financial health checks and forecasts

4.   Recommendation: Specific products and prices

5.   Intermediation: Act as agent for the customer with product providers

6.   Reviews: Customer agreed on-going service.

We then apply the ‘intermediation gateway’, which highlights where or if any intention to purchase a product is made throughout the 6-step process. If intention to purchase is evidenced, then even if the customer does not go ahead and purchase there is no VAT applicable. Thus step 5 above will always be VAT free, but stages 1-4 are VAT-able if there is no intent to purchase products from the intermediary.

What determines step 6’s inclusion to non VAT-able status is again the intent to purchase or not.

When is the exempt supply closed?

1.   Advice permission only used: e.g. If a financial plan is purchased then there is VAT applicable

2.   Intermediation cannot be completed: e.g. If a Discretionary fund manager service is outsourced, this is a service that is not exempt and thus intermediation is broken.

Put simply the VAT stress test should be the answer to the question; what have I done for the client to earn consideration/payment?

Product Providers:

A brief overview on the product in this process is needed to ensure ‘unintended’ consequences of this guidance are addressed.

1.   Product providers will only have to gain involvement if they facilitate adviser charging across the product boundary. i.e. direct fees are not their responsibility.

2.   AC is between the client and adviser; consultancy charging is between the employer and the adviser firm.

3.   A new terms of business is required to facilitate charging. This needs to include the charge amount limits and times for payment.

4.   Providers do not need to know about AC/CC outside the product.

5.   Advisers not product providers to keep VAT records.

6.   Products that cannot facilitate AC or CC will have to be withdrawn

7.   FSA Cooling of requirements are such that this may be paid net or gross. Gross means a delay in AC deduction until after cooling off or reclaim paid AC from the adviser. Net is simply a refund of the customer investment. Importantly they adviser client agreements to cover terms on refunds. The caveat here is to remember this is the client money not the advisory firms.

Engage’s view on this is AC facilitation is going to be difficult to implement, particularly when you consider the tax implications on crossing pension, Isa product boundaries for example. The answer: unbundled fee based advice only. To charge the client directly and this is where we see the need for soft skills to ensure the value of advice is understood and retained by the customer.

Finally the impact of the Deutsche Bank Discretionary Investment Management   case is yet to be felt with the ruling expected later this year. The issue here is the fact that again nothing has changed. The customer receives a single indivisible supply. A ‘split’ fee does thus not impact them, as the predominant element is the management function. This means it’s VAT-able.

In summary, the key point here is terminology, the EU refers to portfolio management, which is the same as a ‘special investment fund’, which is not exempted. A review of terminology used will certainly clear a lot of misconception and facilitate an ‘unbundled’ transparent strategy for VAT and AC going forward.

Chris Davies is director of Engage Partnership


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There are 13 comments at the moment, we would love to hear your opinion too.

  1. Where an adviser recommends an exempt product, e.g pension, ISA but the investment within the product is managed by a DFM, e.g. a model portfolio, is the IFA providing a service which is part exempt and part subject to VAT, and if so how would the charge be split?

  2. My head hurts.

    Roll on retirement.

  3. Unbelievable that with only 7 months left to go there is still so much confusion. VAT means cunsumer detriment to the value of an additional 20%. Never mind clarity of cost of advice. This could have been easily done by limiting the aount of commission payable under all investments. Its 20% on top of the advice fee if only advice is required. I am sure if the FSA had asked a few basic questions of middle UK in plain language (or now now go back and and ask these questions whilst there is still time) “There is no evidence to demonstrate commission bias in the market however we are considering banning it anyway. Would you be happy to have a 20% increase in the cost of advice if we ban commission in favour of adviser charging?” Next question should be “Would you be happy to have to sell units in your Unit trust which may incur a capital gains tax charge to pay for ongoing advice or would you prefer not to have to worry about any CGT liability as is the case now?” and finally “Would you be happy with potential tax liability from your pension to pay for ongoing advice under consultancy charging or have no liability as is the case currently via commission?” It doesnt take rocket science to work out what the answer would be. It is disgraceful what the FAS is getting away with under the guise of RDR. It is flawed and is going to create so much consumer detriment, but will they listen? No. Will they do the right thing? No. Will they take on board the flaws and at worst delay the RDR until these are sorted out? No. They dont care about anything other than creating a monster that will secure the regulator’s future for the next 30 year or more. Before you RDR supporters start saying these are loaded or pointed questions, get off your high horses – they are facts plain and simple. Disgraceful, verging on the criminal behavoiur by a regulator that is totally unfit for purpose.

  4. Oh Marty, most of us are not “RDR supporters”. We’re just IFAs who have understood that there is a new way of working, and have got on with being prepared for that. RDR is with us, like it or not, and we must all act within the new rules.

    There’s not much else to be said.

  5. Stephen Rowland 29th May 2012 at 3:37 pm

    If due to pressure the Pasty Tax & Static Caravan Tax can be diluted / stopped – Why not RDR & THE SAVINGS / PENSIONS OF HARD PRESSED MIDDLE ENGLAND!

    IFA@2.30PM – If we all caved in like you – we would be under Nazi Rule by now!!!

  6. At Anon 3.37. I don’t agree, if foreign invadors tried to take over the country, we would all fight them. If we are told there’s a slightly different way of making financial advice charges, and that we all need minimum qualifications, most IFAs just get on with it. You can hardly mistake the Sants for Hitler, even if you don’t like him very much!

    But also – in what way are YOU not “caving-in”? How have you battled the FSA and what achievements have you made to date? Moaning on a website isn’t fighting the FSA. And if you refuse to get qualified, and change the charging system – then you’re out of business in 6 months! Some “fight”! That’s the reality, like it or not.

  7. stephen rowland 29th May 2012 at 4:40 pm

    By ‘Financial Advice charges’ you mean fiddled hourly rates / added hours – then yesIi am against it!!

    If you are also saying that Sant’s is NOT acting like a dictator ie Hitler – I think most readers on here would disagree with you! How many times has he listened to the Industry?

    Regarding ‘caving in’ – it’s you who are capitulating to the FSA – not me or like minded IFA’S -saying how high do you want me to jump Mr Sant’s- JUST like a TRAINED poodle!

    My achievments is serving my clients with common sense & dexterity – not seeing if they can afford bloated fees or not!

    If that’s reality – then we might all be better off without it!

    Again those are those that ‘cave in & do as they are told & others who continue &’moan’ on websites to try & get justice & right for middle ENGLAND!

  8. Anon : 4.40. RDR does NOT mean hourly fees – most clients don’t want it, and most IFAs won’t be charging by the hour, now or in the future. Why do you think RDR means hourly fees? Very strange.

    Re Hitler & Sants – now you’re just being silly.

    Re : your fight and not caving in to the FSA – you failed to explain how you’ve been “fighting” or what your achievements were.

    I’m serving my clients by just making sure I’m here next year – by getting RDR proofed…I hope you are too, as that’s the next way to help out clients from January. Quitting the business (the only other alternative) won’t help them at all.

  9. Mark Polson, the lang cat 29th May 2012 at 9:08 pm

    Chris, this is a really good piece. It is complex because, well, it’s complex. I’m interested in the cooling off provisions – do you see providers inserting clawback mechanisms where they’ve facilitated AC as a ‘service’ or will the client be tapping up the IFA directly?
    IFA at 5.18pm – more power to you.
    Anonymous – have a word with yourself. Not only is the comparison of Sants/FSA to a dictator silly, it does dishonour to the millions of people killed by dictators, some of them quite recently in Syria. I suspect their families don’t see much in common between the butchering of their relatives and you having to charge for advice differently. I suspect you know this, which is why you’re not putting your name down.

  10. stephen rowland 30th May 2012 at 11:15 am

    Dear Mark – Have you had a humour bypass or heard of ‘tongue in cheek? You really should ‘get a life’ & get your head out of those Exam Books!


  11. Tks Mark, technically the PP do not own the AC and thus cooling of provisions is a point for the client agreement and product agency agreements. If Platform is involved (service) then a clawback could be in place – again an area that needs clarity.

    Have to say the comments have really exasperated me, all contributers to MM are wanting the same thing: meaingful debate, not mindless banter which helps no one and may upset a few. I’ll be taking this up with MM directly.

  12. I have to say, I agree with IFA @ 2:38pm and the ongoing debate with Anon. Unless you’re actually getting out there and ‘fighting’ the FSA and RDR, then I would suggest being a bit more realistic and preparing for the inevitable RDR.

  13. Chris
    Can you answer my question please.

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