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Ernst & Young VAT warning over platform reform

VAT may be applied to platform fees and rebates under the FSA’s rules on platform charging, according to Ernst & Young.

The company says the FSA’s definition of platforms as providing administration services rather than distribution services, as detailed in its November discussion paper, could have unintended tax implications.

In a report looking at the life and pension sector, published this week, E&Y says: “Since administration work is, in principle, a VAT-chargeable service, whereas distribution is exempt, we are concerned that the wording of the FSA’s rules on platform charging may lead to the application of VAT to platform fees and rebates.”

Fidelity International head of UK fund partners Ed Dymott says: “There is a material risk that if the final rules are written to focus on platforms as administration services, that VAT could apply to platform fees.

“It would be an incredibly poor outcome if the platform rules were written in such a way that they became less tax-efficient. One of the biggest elephants in the room over the RDR is the impact of tax.”

An FSA spokesman says: “This issue is exactly the kind of thing we expect to be fed back as part of the consultation process.”

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. As I have been telling my friends within the industry from the start, the RDR process is a back door way of collecting tax. Fees v Commission. Fees are Vatable, commission is not. The Revenue have never been happy with the way advisers have been paid through the commission route as they have been unable to touch them – until now. You take your fees/commissions and add 20%. Makes you even more unappealling to the mass market so you go after the HNW meanwhile those at the bottom buy of the internet with no advice and no understanding of what they have bought and no comeback as no advice was given so no FSCS. A very nice little earner for HMRC work it out! even a small practice with say fees/trail of £100k. £20k to revenue. How much do you do a year? How much will you have to give them?

  2. Sorry David. commission is only non vatable if for the sale of a product. If commission is taken for an ongoing service then it is vatable

  3. Dave Todd, from what I discern from the E&Y article its got nothing to do with trail fee’s

  4. VAT, as it applies to financial services, is subject to pretty fuzzy rules but, wherever it does apply, the ‘end user’ – the man in the street – ends up copping the bill directly or indirectly, and the ability for some outlets of financial services to sidestep or legitimately avoid VAT has the ability to distort the market unfairly.

    I would love VAT to disappear as a concern in our industry. As David Todd says, VAT distorts the value for money consumers receive depending upon what kind of service they select, and places VAT-able fee-charging advice at a disadvantage.

    Exempting both financial advice and investment execution from VAT would be ideal, to rid us of this distortion once and for all but since the incumbent chancellor is not thinking too hard about how to alleviate the tax burden, clear guidance from HMRC on how VAT applies to our industry, and a genuine attempt to provide a level playing field for all, would surely be the next best thing.

  5. E & Y’s concerns appear to assume that the dominant relationship is between the client and the platform provider, and that the financial planner is being remunerated as an ‘introducer’.

    Most planners would assert, and most clients would agree, that the primary relationship is between the planner and the client, with transaction/administration services being outsourced to the platform provider. If this is potentially ambiguous from a regulatory/legal perspective, then the solution would be to have a tri-partite contract drawn up in clarification of this.

    This would confirm that the platform is acting as the agent of the planner in dealings with clients and is merely collecting and administering fee payments on behalf of the planner. Consequently, the VAT treatment will remain the same, and benefit from the FS Exemption, as for direct invoicing.

    More importantly, the platform provider should agree that any standard-rated VAT is paid to HMRC on behalf of the planner, who will then receive the benefit of that VAT. I suspect that very few firms receive this significant benefit at present.

    Clarification of the contractual arrangements would also assist financial planners firms in asserting that the value of assets under management should sit on their balance sheets, rather than those of the platform provider.

    However, I suspect that platforms may be unwilling to assist in achieving transparency in this regard ……..

  6. Martin O'Connell 4th February 2011 at 9:01 am

    In my experience, the issue of VAT is almost universally misunderstood in the way that David Todd has articulated. Fees and commission are just two different ways of being paid and have nothing to do with what is VATable. The distinction to make is what being paid for; advice or product sale/intermediation, and that has long been the case. The only reason commission is believed to be VAT exempt is that it is created when a product is sold, and it has been convenient for all advisers to become intermediaries at that moment, so that VAT has never been payable

    A number of advisers have suggested to me that they will await clarification from the FSA about VAT rules post RDR. My understanding is that VAT rules are not the remit of the FSA but of HMRC and I don’t believe HMRC have any intention of changing them. Could be wrong.

    For me, the use of a Wrap as a part of the proposition to a client makes it a part of the advice and recommendation the adviser has given the client. That the Wrap creates another means of paying for that advice only means that there is another way of paying for the advice. It is the advice that remains VATable

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