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HMRC backtracks on VAT for ongoing advice

HMRC 450

HM Revenue & Customs has backtracked on its view that ongoing advice services should be subject to VAT following industry pressure.

Last week, Money Marketing highlighted the lack of clarity on VAT being charged on ongoing services, such as annual reviews, based on correspondence from HMRC. It contradicted earlier guidance this year from the Government body and recent guidance from the Personal Finance Society, which had been agreed with HMRC.

Final guidance from HMRC earlier this year suggested if an ongoing service was agreed with the client at the outset, as part of a six-stage advice process, it woud be VAT-exempt. PFS guidance last month then suggested that rebalancing at review stage would be VAT-exempt but the review would be VAT-able if no action was taken.

HMRC then went further in industry correspondence by suggesting the industry had misinterpreted its original guidance and that ongoing advice services are likely to be a taxable portfolio management service.

However, following last week’s article, HMRC has issued a further statement backtracking on these comments and stating that ongoing advice, agreed at outset, could be VAT-exempt. It is understood that HMRC’s VAT RDR team has been reshuffled. An HMRC spokesman says: “The services of an IFA signing up a client to a periodic review service at the time the client buys their exempt financial products will be an ancillary part of the exempt supply of intermediation.

“This is conditional, however, on the periodic review service being a relatively minor element of the overall supply in terms of both what is provided and what is charged for. If it is not, we may see the review service as being the principal supply and not the intermediation.”

HMRC distinguishes VAT-exempt ongoing advice from ongoing charges made for portfolio services, where the entire service is subject to VAT.

PFS chief executive Fay Goddard says: “We presented these arguments back to HMRC and we are delighted they have revised their advice to us accordingly. We will amend our examples to reflect this latest clarification. We are pleased we have reverted to the position at which we first started.”

Aifa senior technical analyst Linda Smith says: “Advisers need to be very clear about the service they are providing so that both the clients and the authorities understand it.”

Institute of Financial Planning chief executive Nick Cann says: “HMRC and regulators generally need to be more helpful and more simplistic with the information they put out to enable firms to get on with serving their clients and meet the requirements. It is not helpful to set out guidance in language that leaves it open to intepretation.”

Ovation Finance managing director Chris Budd says: “HMRC’s clarification seems to pivot on the difference between review or ongoing services as provided by the IFA, and portfolio review or management services as provided by discretionary fund managers. The first seems likely to be exempt from VAT, while the second is VAT-able.”

Chartered accountancy firm Moore Stephens director of indirect tax services Mark Chesham says: “This is a welcome reversion back to the industry’s original position.”

But Chesham would also like to see more detail on the timescales needed to qualify as an aborted transaction, which the PFS guidance classes as exempt, and a recommendation which is not acted on, which is VAT-able.


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There are 30 comments at the moment, we would love to hear your opinion too.

  1. Here we go again RDR to be in the clients best interest Reallly I dont think so. So many changes , so many if’s and but’s a real pigs ear

  2. Couldn’t start a fire in a match factory!

    Having had previous dealings with the VAT office in respect of my wife’s business I can assure you none of them have a clue themselves so getting consistent guidance is impossible. They just make it up as they go along.

    Don’t worry, they’ll say something different again next week.

  3. From start to finish, simply to fulfill the FSA’s original ill-considered agenda to remove commission from financial services, HMRC have made a pigs ear of the VAT issue. Even now, there is too much left open to interpretation.

    It is almost impossible to believe that, on the one hand, the government says it is supportive of closing the savings gap and encouraging self-sufficiency whilst, on the other hand, the FSA and HMRC are, between them, destroying financial services in the UK.

  4. Remind me again. How many days to RDR?

  5. Still as clear as mud …

    “This is conditional, however, on the periodic review service being a relatively minor element of the overall supply in terms of both what is provided and what is charged for. ”

    What does relatively minor mean? I bet HMRC will have a very different definition to us!

  6. Neil F Liversidge 17th October 2012 at 9:37 am

    Here we go, with ten weeks to the new ‘RDR World’ and crucial issues are still shrouded in confusion. The FSA risks wrecking an industry crucial to the UK’s future. This is an utter disgrace. To the FSA and HMRC: I have to run a business, service clients and employ people after 1 January 2013. Any chance you couild get YOUR act together?

  7. I welcome this apparent U-turn by HMRC. Common sense prevails. What a great opportunity advisers now have to encourage new clients to opt for regular review services at outset. Don’t knock it!

  8. An HMRC spokesman says “This is conditional, however, on the periodic review service being a relatively minor element of the overall supply in terms of both what is provided and what is charged for. If it is not, we may see the review service as being the principal supply and not the intermediation.” Mmm. How do you calculate what “relatively minor” is? Maybe some more “final guidance” will be forthcoming?

  9. A welcome clarification but there is still more clarification required. Mark Chesham is correct – we need to know at outset whether VAT should charged so that interim and final invoices have the correct amount of VAT charged and we have the necessary evidence on file. Local inspectors (who understandably do not have a clue) and tax tribunals to establish the actual rules simply does not wash.

  10. why do organizations such as HMRC and the FSA give such vague ‘guidance’?

    if we were to be so vague with our clients we would be out of business.

    surely with the amount of fees and taxes that we pay to the FSA / HMRC they could provide us with some definitive answers?

    i suppose one of the issues is that our clients have plenty of choice as to where the source their advice and purchase products from. We dont have that luxury. We are stuck with the FSA and HMRC who are answerable to no one. It seems like a very easy option to provide some information that could be interpreted in any way, then to retrospecively enforce due to mis-interpretation.

    Come on lads, play the game…. give us all some help….. please?

  11. This then means that advisers who use a wrap will need to charge VAT on their trail. If you use a multi-manager and receive trail for review work then there’s no VAT but if your ongoing service is more substantial, for example managing the clients portfolio/fund switching etc (exactly the selling points of wraps) where you might be charging 1% initial fee and 1% trail (so the trail is no longer “ancilliary” to the main advice but actually a substantial part of the overall package, then VAT will be due.

  12. Nooooo! Just when I’d got it sorted in my head they scramble it up again!
    I suppose we’ll have to wait for test cases in the courts before we get some reliable steer.

  13. VAT or no VAT that is the question ?

    To be honest find it hard to know my arse from my elbow anymore ?

    The only thing that seems certain is there is going to be a lot of money wasted both pre and post 2013

  14. To HMRC: Thank you (I think) for your vague clarification. To the FSA: Shame on you for all this messing around over your pointless commission ban. With 10 weeks to to the deadline I have just come accross somethig that totally flies in the face of one of the MAJOR rdr objectives- to avoid any potential bias. One big provider who shall remain nameless had an article recently which read “we are ready for RDR if you are” so I thought I would give it a go. When it came to adviser charging I could complete the quote for initial charge but couldnt find the button for the on-going AC. Called them to be told they are not facilitating ongoing AC. Ok let me think about that for a second. I have clients who are happy to pay ongoing service but cant afford to pay it themselves. The nameless company could have the best prodcut in the world but I am not going to give them any business as they cant pay me via the product as per clients wishes. I will go to a different company who can facilitate the AC. Hello but is this not bias in its clearest format? Like I said at the start SHAME ON YOU FSA. You are disgusting in some of the things you do and have done.

  15. For me the biggest thing coming from HMRC guidance is that the intermediation activity fee has to be in the same agreement as the advice and planning fees, which are agreed upfront, in order to gain VAT exemption for all services. This makes identifying VAtability upfront difficult.

    Logically, the client should be able to know the exact fee for the service provided before they proceed to acquire your services would you not say? But with a variance on whether or not you will arrange a product for the client then the fee for stages 1-4 is never finalised until intermediation takes place! This makes a including the fee for intermediation in the same agreement as the fee for advice and planning impossible. This leaves you needing to implement a 2 stage process therefore making VATexemption on advice impossible which surely defeats the object of the new guidance?

    A controversial interpretation of the HMRC guidance would be that where the client agrees upfront for the firm to provide services that include intermediation between them and the provider, and that one of their objectives is to arrange products with you where appropriate, the planning and advisory stages of the service should be exempt from VAT whether or not a product is actually arranged for the client because you have opened up the intermediation gateway.

    -Your fee agreement clearly confirms the client agrees to pursue intermediation services with your firm
    -Fact find records clients objectives to arrange any suitable products with your firm
    -Financial Plan/Report confirms that although client wished to carry out the arrangement of products with the firm none were suitable at the time.

    Thoughts anyone?

  16. @MJ
    This piece is is looking at one aspect of the VAT issue – advice on regular review. It is not looking at portfolio re-balancing which is regarded as a different activity; where, for the most part, new funds are recommended regularly and as such the predominant service & intention is intermediation and thus rendering the whole service exempt.

    While it is confusing there are some clear principles:

    Intermediation is exempt
    Most things in the run up to and indeed after intermediation are exempt
    VAT is self assessment
    Where intermediation is the predominant service all services surrounding are exempt
    Portfolio rebalancing and fund switching are a form of intermediton and exempt

  17. Anonymous @12.23
    I don’t think what you have said is controversial at all. I think it is spot on and indeed the intention of HMRC.

  18. Anonymous @ 12:23. I do not think it controversial at all either. It is workable, practical and sensible. Fair to HMRC and to the client.
    I would dearly love to know why the word intention was removed by the HMRC for I feel that is the crux of the matter here.

  19. Reflection is a bad thing… Anonymous @12:23: The rules on the HMRC’s website are clear. If the liability for VAT changes so the service you provide becomes a VATable service, then from the moment when the contract with the client was entered into, VAT must be charged. This has always been the case except for intermediaries who were subject to different guidance. The terminology used for IFAs was the “intention at outset”. Intent has now been removed, making it consistent with existing HMRC guidance for other types of businesses but it has made life difficult for IFAs. (It may possibly remind the HMRC why the word intent was there in the first place!) As it stands now, if the initial intention (as documented) is to intermediate and you do not because you do not or cannot bring together the two parties involved then the HMRC could argue using existing rules that the liability has changed. Therefore the client must be charged VAT in spite of what you agreed up front. (Incidentally the FSA has recently stated that they agree with this view!)
    Of course, this is nonsense in the real world whereby you could reach the situation where you say to a client fill in the forms in any case even though you do not wish to, and you will avoid VAT! And the VAT tail is wagging the advice dog which is risking poor outcomes for the client. And TCF has gone! Farcical.

  20. At least some commonsense coming from the VAT office at long last as ongoing advice when connected to a financial product should not have VAT attached to it.

    It also encourages clients to agree to ongoing advice retainers which is only good news for us advisers.

    For the larger clients VAT is a bit of a nonstory anyway as they are used to having to pay for it on accountancy and solicitor bills so why not on financial advice. The vast majority of what we do will be VAT exempt and I suspect the small amount of work that we will do for clients that is VAT will either fall into the Will writing services all business advice category where clients are able to reclaim anyway.

  21. Steve Patterson, Intelligent Pensions 17th October 2012 at 3:00 pm

    @ Sam Caunt. Not sure you have got this quite right. The requirement for VAT exemption requires 5 out of 6 stages to be followed as per the HMRC Final Guidance. The confusion was around stage 6 and when ongoing reviews would also qualify for VAT exemption. What is critical is how your Client Agreement is worded and we will be posting some information on our website shortly. Hopefully this will be of some assistance.

  22. Steve – my concern is that ongoing reviews may have been clarified, but if your client agreement says one thing (intention to intermediate) and you do not complete stages 5 and 6 even though you intended to, existing guidance states that VAT is chargeable – which is absurd. This piecemeal clarification from HMRC and the focus on specific aspects while ignoring other concerns does not help us.

  23. Steve Patterson, Intelligent Pensions 17th October 2012 at 3:54 pm

    Hi Sam, you might find the Bloomsbury decision helpful. You would only be providing a Vatable supply if your initial fee was due regardless of the client’s decision to follow your advice. Should any IFAs wish a copy please e-mail our office at

  24. How does Europe view VAT these days? Don’t they say that where there is clear intent to supply exempt services then its a clear act of intermediation?

    Do we have to fall in line or do we just do what we want regardless?

    Absolutely confuddled!

  25. So the most recent FSA Guidance on Feb 29 entirely supercedes the whole of the Finance Notice –

    HMRC Reference:Notice 701/49 (November 2011)

    But particular section 9? Why hasn’t it been removed from their website then?

    Remaining continually confused.

  26. Hokey cokey springs to mind!

    Come on, effectively two months to go and HMR&C still don’t know their arse from our elbow.

    Do we charge VAT or not? A simple question requiring a simple answer!

  27. Calling them a bunch of twots would be an unkind discrimination against twots.

  28. Depends if you wanna be known as a product hawker or adviser.

  29. So now, IFAs have to become tax experts despite most of those working within HMRC not having a bloody clue themselves. HMRC is making it up as they go along and the FSA neverunderstood the repercussions of their ill-thought-through agenda. The sad thing is that whilst we all scratch our heads worrying that the VAT inspector might come knocking we are not doing what we’re paid for – helping clients to make good financial planning decisions. Talk about the tax tail wagging the advice dog.

  30. Sorry Steve I dont agree, the Bloomsbury case was a tribunal not a court case and can be ignored by a different VAT inspector. Also it would preclude any substantive work, “relatively minor element ” is the worry part as FOS expect reviews of post retirement plans to be as extensive as at inception- this would indicate that any review more than a re balance will carry VAT.

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