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Doubts still remain on VAT interpretation

A long time ago, I remember asking a senior regulator what she and her colleagues thought about the IFA trade press. “Most of the time we laugh at what you write,” she told me. “The stories are usually short on facts and long on unsubstantiated opinions and generally they give voice to the backward elements of the IFA community and their representatives.”

This person’s comments were uttered more than a decade ago in the course of a loud, crowded and bibulous drinks party, plus I am paraphrasing her views.

I was not writing for Money Marketing at the time but I suspect that these unguarded views still hold true for most trade newspapers, most of the time. There are exceptions to this, which I will come on to in a minute, but it is safe to say regulators ignore much of what they read in the trade press.

Even so, I wonder what they are making this week of the mounting number of stories in trade newspapers about VAT and financial advice. Last month, Tisa entered the fray, calling on HM Revenue & Customs to offer a VAT amnesty on past advice business.

The implication of Tisa’s call is that some advisers may not be charging VAT for services that they ought to be – and their interpretation of HMRC rules in this area leaves them open to a retrospective VAT bill.

A Revenue & Customs crackdown on VAT, coming as it does as IFAs prepare for the 2012 RDR deadline, would undoubtedly tip some advisers over the edge financially, never mind their long-term willingness to offer a fee-based service to clients.

No wonder the Institute for Financial Planning is pushing for greater consistency from HMRC on this issue. IFP chief executive Nick Cann has said that local HMRC inspectors sometimes interpret the rules differently.

The problem is that the latest guidance, jointly published last August by the ABI and HMRC is bound to be open to different interpretations, mostly from advisers who are operating from the best possible motives in respect of their clients.

My own reading of the ABI/HMRC paper is that if financial advice – for example a financial plan, investment allocation advice or financial review where no transaction occurs – VAT is payable by the client on a fee charged for that service.

But if the adviser arranges the purchase of a financial product, this transaction is VAT-exempt. The paper states: “Where the advice provided directly results in the customer taking out a financial or insurance product the whole of the service including the advice element is exempt from VAT.”

If the advice is given and a transaction occurs, the overall service may be exempt from VAT, but IFAs have to establish which of the elements of the service predominates.

Last year, I read comments from Gill Cardy, an IFA whose views I have long respected, to the effect that HMRC’s guidance is more nuanced. In an online response to one article, Gill claimed: “If the various elements of your intermediation service are linked then (subject to the “loads of VAT-able advice and piffling investment” restriction) the whole service becomes VAT exempt.

“Given that the FSA makes it perfectly clear that intermediation can only follow from fact-finding, information-gathering on existing arrangements, product research, preparation of recommendations and associated administration, including suitability letters, I have no problem in asserting that all of those elements are a necessary part of ’intermediation’ and therefore VAT-free.”

Equally significant is Gill’s assertion that VAT is not conditional on a product sale actually taking place, so if intermediation is envisaged but the client does not proceed that is still VAT-exempt.

All this sounds helpful. Yet I still have doubts. Or at least, I have doubts as to whether all HMRC offices will see things the same way. To me, this sounds like the perfect issue to tackle not just the FSA over, as some at last week’s PIMS conference were suggesting, but also the Treasury.

After all, if Mark Hoban and his chums want to see the RDR being introduced for the benefit of consumers, then a 20 per cent charge on fee-based advice ought to be the last thing they want to see. A co-ordinated consumer-focused campaign led by IFA trade bodies could help not only avert the prospect of such a VAT bill, it could also show the public that IFAs are on their side.

Which brings me back to the trade press – when, if ever, have regulators taken any notice of what we write? Admittedly, this goes back along time ago, but I recall being told that the old PIA finally took notice when the occasional drip-drip of stories over the soaring costs of professional indemnity cover became an angry avalanche.

Similarly, I spoke to a politician last year who told me that regulators were “nervy” about the IFA anger over the FSCS levy in the wake of Keydata’s collapse.
There is an opportunity here for trade bodies and the IFA press to step into and make their own.

Nic Cicutti can be contacted at


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. Julian Stevens 26th May 2011 at 10:47 am

    Rather than the regulators simply ignoring much of what they read in the trade press, might it not be more constructive if they were to respond to articles that are either short on accurate information or which include plain inaccuracies, so as to clarify the their intentions? It’s all very well to deride, dismiss and/or ignore indignant responses from those who read such articles in the possibly mistaken belief that they’re accurate when in fact they may not be, but such behaviour hardly constitutes postive engagement with those over whom the FSA wields so much power.

    A prime example is the proposal to ban commission, which many people mistakenly interpreted as meaning that they’d have to start asking clients to pay fees which, as we know, many clients don’t wish to, for one reason or another. The FSA should have responded to reports in the trade press explaining that Adviser Charging will, in practice, work in much the same way as commission, the principal difference being that from 2013 onwards the adviser will need to obtain from the client his/her signed agreement to the amount proposed. Had the FSA done that, then a great deal of the angry comments posted by IFA’s who feel that the regulator fails to understand how clients actually feel about being asked to pay fees would surely have been avoided.

    This why I have suggested that instead of, or perhaps in addition to, churning out vast tracts of consultative papers which most IFA’s have neither the time or inclination to read, it would be better if the FSA were to allocate just a small proportion of its very considerable resources to setting up its own blog spot on which members of the regulated community could post their comments and questions (subject, of course, the reasonable moderation). The FSA could then respond quickly to correct or clarify any misunderstandings or misinterpretations of its intentions. The trouble is, though, that this would be akin to the FSA publishing for all to see and to debate the responses submitted in response to its programmes of consultation which, as we know, it seems extremely reluctant to do.

    BTW, Nic, you seem to have become somewhat less caustic of late.

  2. Unfortunately the FSA do not recognise “intermediation”. Logically, I have always argued that if VAT is charged on advice then no intermediation is involved i.e. the bringing together of two parties. So if you are not bringing them together there can be no product! But the FSA say that the fee is related to product, insist that you attribute it to a product area and justify this by claiming they do not recognise HMRC terminology. So if you do a financial plan and report it is VATable because there is no product and no intermediation. But as far as the FSA is concerned it is and you have to allocate it to a product. It is illogical (farcical) and partly explains why the FSCS levy was wrong as it was too focussed on product. Of course, if we argued that all our VAT invoices were exempt from the levy they would lose money – or other IFAs would have to foot the bill.

  3. And dont forget one other outstanding VAT issue; trail is paid and IS VAT exempt (because the original transaction was intermediation), so far so good; but that trail is then passed (via business purchase, adviser moving, novation etc) to a different legal entity who can no longer claim they took part in the original intermediation of that product. What then?
    Also, post 2013, the client can transfer or change the “trail” between advisers – assuming it was VAT exempt under the first adviser who arranged the product, how could it still be VAT exempt income to the second adviser, who took no part in the original intermediation? Will the VAT be charged on top of trail to the client or deducted from it by the second adviser, who might therefore have to increase their charges for such trail? Is such a VAT increase fair to the client?

  4. I agree with Julian, Sam and Paul above. Basically adviser charging and the RDR are good ideas that still need smoothing out before final implementation, there are just too many unexpected consequences being discovered by the day.
    And as to the FSA actually engaging with the FS community through on-line blogs, why not? David Ross from the CII makes a very good job of engaging with the FS industry and discussing difficult issues (and with difficult people like me) Come on FSA, engage, don’t dictate. But then they’d have to know at least as much about FS as David Ross if not more in order to debate issues openly.

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