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.
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?
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