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HMRC admits clarity needed on adviser charging

HM Revenue & Customs has admitted that more clarity is needed around the tax implications of adviser charging under the RDR.

HMRC has written to the financial services industry following last week’s Budget.

The letter reveals that a working group, made up officials from the Treasury, HMRC, the FSA and industry bodies, has been working to resolve the tax implications of adviser charging around issues such as VAT and the tax applicable to bonds.

HMRC’s letter says: “Following work to date we have identified some areas where further clarity would be helpful for the industry in preparing for the transition [to the RDR]. We are exploring the options around updating HMRC’s technical guidance.

“The areas under consideration include updates to the HMRC VAT guidance and registered pension schemes manual; technical advice on capital gains tax – acquisition costs and adviser fees; and products written in trust.”

Personal Finance Society chief executive Fay Goddard says: “It is positive that this issue was important enough to be acknowledged in the Budget.”

She says there needs to be guidance around VAT charging, but also what happens where clients opt to pay adviser charges through the product.

Goddard gives the example of clients choosing to pay for advice through an life insurance bond. In this case the 5 per cent income usually paid to the client would have to be reduced as a result of adviser charging deductions.

In the case of unit trusts, where units have to be encashed to pay for the adviser charge, this could in turn generate a taxable event.

She adds: “People who are creating business models now will need to be aware of some of these quite fundamental issues when they are planning how they are going to adopt adviser charging.

“My real concern is that unless these things are sorted out quite quickly, we could have a situation where people are running with a business model through next year and come January 1, 2013 they have got to adopt a different methodology.”


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There are 18 comments at the moment, we would love to hear your opinion too.

  1. Steven Farrall (Adviser Alliance) 28th March 2011 at 4:36 pm

    There you are. More havoc created by bureaucratic functionaries in the spontaneous order of the free market. What a huge waste of time and everyone’s money (that is everyone except the tax consuming functionaries at the FSA and HMRC) . You couldn’t make it up. Well you could actually, and Ayn Rand did.

  2. How many F***ing times over the past 13 years years have I pointed this out on here and dozens of other Financial sites??? CP121 was the first warning of a stealth tax to attack Commisions and turn them into fees;. The FSA say they want to reduce costs for the consumer while doing everything in their power to Increase them, by the rate of tax they pay and then add vat at 20% on top.

    Fay Goddard try listening to the older IFA’s who dont have level 4 qualifications, just experience and common sense!

  3. The VAT aspect of fee charging has always worried me. Arranging a financial product is VAT exempt. Giving Advice is Vatable. It’s often stated that “as long as a product is arranged there’s no VAT” – I’ve never really followed the logic in that statement.

  4. With great regret over the last couple of weeks I have come to the conclusion that there is no future in financial advice.

    Regulatory meddling has meant that you cannot invest or plan for the future because you don’t know what artificial business risks there will be on top of all the risks that any business has to suffer.

    Regulatory risk means that no matter how good a job you do, and no matter how pleased your clients are, after the event the FSA can review your work and put you out of business.

    Add another 20% tax on top of FOS, FSA, FSCS, Compliance consultants and there will be no financial advice for anyone.

    Time to sell up and do something else I think.

  5. David Trenner - Intelligent Pensions 28th March 2011 at 5:23 pm

    Rod Leonard said: “Fay Goddard try listening to the older IFA’s who dont have level 4 qualifications, just experience and common sense!”

    This will come as a surprise to you Rod: some of us have experience, common sense and professional qualifications as well!!

  6. As far as I am aware, God didn’t make up the current rules and he will have little to do with any new rules.

    If the FSA and HMRC don’t know what rules we have to play by then how are we (IFAs) supposed to know. Is it too much to ask that these plonkers give us some clarity before the RDR debacle finally goes into force.

    That said, we all know what the outcome will be – the FSA, OFT, and all the other leeches will be joined by the blood-sucking HMRC to ensure that IFAs businesses are eventually destroyed and consumers are indirectly caused to pay more for advice.

  7. Does this mean the guy down the pub giving advice is VATable?

    I suspect a lot of small IFA will “transact” business without giving “advice” but there might be a lot of conversations in the pub. It will appeal to the client 20% saving and none of that Suitability Letter nonsense.

    Oh and lets not forget all “execution only” so no liability and if you’re not paid for giving advice I believe there is case law which states if you are not paid for a service you cannot be held liable. PI insurers are going to love this!

    Seriously though – they are only now thinking about it? Jeeze!

  8. The phrase Booze up and brewery springs to mind.

    And they have the temerity to grin like Cheshire cats in front of the TSC?

    Sorry FSA, the gloves are off.

    Biff, Bash, Boff, anybody played Street Fighter?

  9. When HMRC cannot get even basic tax codes right I do not have any confidence in getting a consistent response regarding the taxation of adviser charging.

    Remeber tax efficient life insurance it only took them a few months to realise that it was a financial mistake for the Government.

    I have long suspected that the whole exercise is to switch us to fees from which they can claw another 20% VAT further reducing the affordability of financial advice to the middle to lower sections of the market, who will advise them especially if the banks pull out of the advice market?

  10. A D | 28 Mar 2011 6:58 pm
    Sorry to burst your bubble, but whether or not you are paid for the advice, as an IFA you ARE liable for its quality and would be foolish in the extreme not to fully document it. The view of that most exceptional regulator is unlikely to change – if we don’t document it it didn’t happen. The suitability letter is to protect YOU more than it is to inform the reciptient or hadn’t you worked that out yet?

    You can also safely bet everybody’s favourite ambulance chasing firm, “Liars-R-Us” will be there to coach would be litigants on just what “ficts” (fictionalised facts) to remember with 100% clairity to further any conceivable claim.
    Make sure your advice is 100% right and document it in stone. If you aren’t paid for appropriate advice why on earth are you in business?

  11. There you have it. All these new ideas from the FSA just cause unnecessary problems. Why not just keep commission – it is a lot easier, and clients understand it.

  12. Another exasperated IFA 29th March 2011 at 12:35 am

    Frightening. There have been no changes to VAT law. RDR should have no impact on VAT, the issue of intermediation is as it ever was. Fees,commissions, CAR are all an irrelevance. And yet, here we are, clearly facing confusion (aka the need for clarification), inside and outside HMRC with the motive no doubt to ensure the VAT take (payable by clients remember) is increased. The FSA should now publish the VAT section of their RDR cost benefit analysis, show why they believed there would be no consumer detriment and then explain this to the Treasury, assuming they talk to each other that is.

  13. This frustrates me. We pointed out ages ago that the RDR does have an implication regarding VAT. The FSA stated that the purpose of the RDR is to move advisers over to giving advice – and advice is VATable. It always has been. In the past many IFAs have avoided charging VAT in the mistaken belief that since the product is paying for the commission then the service being provided is intermediation. The RDR is now focussing minds on this oversight and a few IFAs are no starting to smell the roses.
    However, what is disgraceful is that this is a significant cost to consumers. 20% on top of your bill is no laughing matter and so given the FSAs stated intention, they should have considered the cost implications of VAT in their assessment of the financial cost of the RDR and its benefit to consumers. It was not, and the FSA failed to carry out properly part of its statutory duty. This is not hindsight and was pointed out by us in our feedback to the FSA on the RDR. Scandalous.

  14. Peter Davies @ Create Wealth 29th March 2011 at 10:05 am

    I can see this one coming a mile off – the authorities in question will see the RDR as a great opportunity to extract more tax and unfortunately we may see the investor having to pay VAT on things they weren’t previously.

  15. Fay Goddard says,
    “My real concern is that unless these things are sorted out quite quickly, we could have a situation where people are running with a business model through next year and come January 1, 2013 they have got to adopt a different methodology.”

    Par for the course when the fsa is involved.

  16. Why don’t we just push for the smug new model adviser types to charge VAT and all the lower caste IFAs to avoid VAT. Would be fascinating to see people jump from high horses

  17. David Trenner

    An honours graduate from Manchester University David has worked in financial services for over 30 years. In addition to holding the Advanced Financial Planning Certificate including the G60 Pensions qualification David has been a senior pension’s examiner for the CII and in his last post was responsible for pension’s technical training for a major UK life insurance company.
    Well done David, it does not surprise me in the slightest however, qualifications alone are not the answer and there are older highly experienced advisors who are being put out to graze, which is completely abhorrent!
    Having a vested interest in the CII / PFS examinations is a conflict of Interest; the bigger picture is that RDR and the FSA are just completely undermined now.
    Rod Leonard Chartered FCSI

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