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Experts warn of wider implications of advice VAT statement

Industry experts believe the European Court of Justice’s recommendation that the entire discretionary fund management service should be VAT-able could have much wider implications on the overall VAT treatment of financial advice.

Last week, advocate general Eleanor Sharpston published an opinion statement on a case brought by a German court and heard in the ECJ in March which questioned Deutsche Bank’s VAT treatment of discretionary services.

Under the VAT Act 1994, discretionary services are subject to VAT but dealing fees and commission involved in discretionary services are exempt.

But Sharpston argued DFM services should not be split in terms of whether there is a transactional element, such as dealing fees, but should be considered as offering one single investment management service, which should all therefore be subject to VAT.

The ECJ will now have to make a final decision on the case before it is referred back to the original German court.

HMRC has said it would be inappropriate to comment until a final judgment is made by the ECJ.

Grant Thornton UK director of indirect taxes Stuart Brodie says if the final judgment echoes the opinion statement, which is often the case, HMRC may have to revisit its position on the overall VAT liability of advice.

Final guidance from HMRC in March said the advice process will be exempt from VAT where clients are looking to take out a retail investment product.

But Brodie says the opinion statement opens up HMRC’s current stance to interpretation.

He says: “It is accepted advice is VAT-able but that putting a product in place would be classed as exempt intermediation. A lot of advisers seem to be pushing the line that all the advice they give is driving towards arranging a product, which means all advice should be exempt. This is similar to the Deutsche Bank argument.

“But thinking the logic through that was made in the opinion statement, it all comes back to what is in the mind of the person investing.”

Brodie says it could be argued an investor is probably looking for advice first and any product they take out as a result is ancillary to the advice process. He says: “HMRC could have to revisit VAT treatment under adviser charging. If the final decision from the ECJ goes the wrong way, this could be the straw that breaks the camel’s back.”

Compliance consultant Adam Samuel believes advocate general Sharpston has been very clear in the wording of her opinion statement and agrees with Brodie that the implications of the Deutsche Bank case could go beyond DFMs.

He says: “Adviser charges and trail commission must be VAT-able. The only exception is execution-only transactions. This opinion statement is much more sensible than the non- sensical UK position on financial advice.”

Bloomsbury Financial Planning partner Jason Butler says the opinion statement supports his understanding of how the VAT rules have always worked.

He says: “There is no doubt that incidental parts of advice that were not treated as taxable should always have been taxable because they were ancillary to the main taxable supply.

“All this opinion statement has done is confirm that the main supply is taxable and ancillary parts, including product sales where these are ancillary to the advice process, should be taxable.”

The VAT story so far

August 2010: HM Revenue & Customs and the Association of British Insurers publish guidance reiterating that VAT is payable on advice and not products. It says where advice leads to a product sale, the adviser must determine which is the predominant service.

September 2011: Representatives from HMRC, the FSA, the Tax Incentivised Savings Association, Aifa and the Investment Management Association meet to discuss VAT under adviser charging. View from the meeting is that liability will be based on the intention of the service at outset.

October 2011: HMRC draft guidance states advice will be exempt where a customer agrees to take a product following adviser recommendations.

November 2011: The FSA warns draft guidance is contradictory as it suggests ongoing advice will be subject to VAT, ongoing advice, including portfolio rebalancing, will be exempt and portfolio advice services, where an adviser suggests particular transactions, will be subject to VAT.

February 2012: Revised draft guidance is sent to industry stakeholders suggesting entire advice process will be exempt from VAT for most advisers. Final guidance is published later the same month, confirming advice will be exempt where clients are looking to take out a retail investment product. References to discretionary investment management, deemed taxable in the first draft of the guidance, are dropped pending the decision on the Deutsche Bank test case in the European Court of Justice.

May 2012: Advocate general Eleanor Sharpston recommends entire discretionary management service should be VAT-able. HMRC declines to comment ahead of final decision from the ECJ.


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