As the deadline for implementing adviser charging looms closer, I have become increasingly concerned by some of the recent commentary on VAT. No doubt, much is well intended but there is not just obvious confusion but some blatantly wrong “advice” being touted and some scaremongering.
Although the Personal Finance Society is not a trade body and we are not directly lobbying for change on this issue, as a member of the HM Revenue and Customs tax advisory group we have been pressing for further clarity on the practical application of VAT and I am pleased to report that our concerns have been listened to and new guidance will be forthcoming later this year.
Thank you to all PFS members who have provided questions and comments that you want addressed. These have been forwarded to HMRC to help them in producing relevant and useful guidance.
To be fair to HMRC, there is already guidance available and the VAT rules have not changed. The problem is that the nature of the services you provide to clients today has, in many cases, changed.
With the evolution of platforms, an increase in holistic financial planning and more firms outsourcing, the VAT guidance that focuses on financial advice or intermediation is not as clear cut today as when it was written.
Now the rules relating to how you are remunerated are also changing and the combination of these factors has created numerous scenarios where interpreting the VAT rules is far from easy, leading to disagreement, considerable subjectivity and inconsistencies.
One of the main issues relates to the definition of financial intermediation and you might find it useful to check out Notice 701/49 VAT: Finance on the HMRC website, in particular in section 9. There are also questions to be answered in respect of legacy business and trail commission, which we expect to be addressed in the new guidance.
How VAT is applied could have a profound impact on both the business model of advisory firms and the accessibility of quality advice by the public.
Some firms are already splitting their services into advising and arranging, and costing each separately for ease of administration. This could mean that consumers will be asked to pay VAT on the advice element of the charge which may not be necessary as the overall service could well end up being intermediation.
The two main drivers for splitting the service are not knowing in advance whether a customer needs or will buy a financial product and, second, wanting certainty over the application of VAT.
In the interests of their clients, some firms may look to avoid additional costs and look for ways of structuring their service so they do not have to charge VAT. There is a view that some firms are likely to ensure their services are exempt by reverting to a transactional business model.
This would be a retrograde step for the financial planning profession and another reason why getting clarity and a consistent approach is so important.
Fay Goddard is chief executive of the Personal Finance Society