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HMRC clarifies VAT stance for adviser charging

Advice where a customer agrees to take out an investment product following adviser recommendations will be exempt from VAT post-RDR under draft guidance published by HM Revenue & Customs.

HMRC published the draft guidance today on when advice given after the RDR is liable for VAT.

The guidance states that if a customer agrees to take out investment products after the adviser has recommended the best investment options, the whole advice process becomes VAT exempt.

HMRC outlines what it considers to be the seven stages of the advice process. The first four are: gathering information about the customer; carrying out research on suitable investment options; providing the customer with reports, financial health checks and forecasts; and advising the customer on the best investment options.

If at this stage the client agrees to go ahead with the transaction, the advice process is VAT exempt.

HMRC lists the remaining stages of the advice process as implementing the agreed options, monitoring the customer’s position to ensure products continue to meet customer’s needs and rebalancing.

However if the customer wishes to receive an advice-only service, then the service will be liable for VAT.

HMRC says: “Where the customer wishes to receive an advice-only service that does not require the adviser to arrange any exempt transactions, then the service of the adviser will be taxable. This includes the provision of general financial advice, tax planning, financial health checks, reviews and reports.

“VAT will also apply to any charges made by advisers in circumstances where stages 1 to 4 of the services outlined above are carried out and the customer decides they do not wish to proceed further.”

The guidance marks a shift away from the VAT liability being guided by the intention of the service, as was signalled by HMRC previously.

Ongoing advice which does not result in a transaction, such as annual financial health checks or reports will be liable for VAT, but where ongoing advice includes portfolio rebalancing the service will be exempt.

Advisers will need to evidence the tax treatment of advice services, through documents such as client contracts, letters of engagement, and regulatory returns.

If an adviser cannot evidence why advice was exempt, VAT will be charged on that service.

Personal Finance Society chief executive Fay Goddard says: “It is helpful to have some clarity. There are still some questions that need answering, particularly around where the line is between reviewing, which is taxable, and rebalancing, which is exempt.

“This issue about where a client decides not to proceed any further, clearly HMRC is saying it is taxable, even if the intent was to intermediate. I think we will see people looking at their proposition on the basis of fees being contingent on the sale. If that is the case it is a retrograde step.”


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There are 14 comments at the moment, we would love to hear your opinion too.

  1. HMRC appears to show a full understanding of the advice process, which is comforting.

    VAT, however, is the least of my concerns post RDR…..

  2. It is a pity that the original “intention” exemption (where the advice was intended to lead to arrangement, but the client decided not to proceed) is lost as this means that the decision to issue an invoice with or without VAT has to be delayed until after the client has received and then considered the advice. Not very practical!

    As Fay Goddard has pointed out, the new guidance leaves us more confused about servicing. If an annual review is described in the client agreement as including “rebalancing”, and it takes place some times, but not others, how on earth do you collect the VAT on those occassions when rebalancing did not take place and where the servicing is paid by a Standing Order or a fee charged to the product?

  3. Now all HMRC and HMG have to do is to explain to customers who have been used to a ‘free’ chat why they are having to pay for an initial meeting where generic financial , but no specifc advice, is being given. Is this the final nail in the ‘free advice’ coffin ! Financial advice for all my foot !!!

  4. VAT, RDR, FSA. Had enough of clueless people, suggesting and implementing mad ideas with NO consideration for the IFA or customer. Bad news all round…!

  5. Sorry Mr Customer I could recommend you a fund with auto rebalancing but……i can charge you more, cos I can’t give free advice it’s not worth my time, and you will need to pay VAT if I don’t. This is better for customers ????? Annual reviews will soon become an expensive luxury for the wealthy only. Not good advice !!!

  6. Surely there’s no VAT payable on ‘free’ advice!

  7. We have possibly the most complicated tax system in the world created further by Gordon Brown and his stealth taxes. HMRC may have clarified what is Vatable however in reality a further administration nightmare depending on whether client proceeds with advice or not. VAT was brought in as “Value Added Tax” originally for luxury items and has now been expanded to cover almost everything including certain staple foods and childrens items that it was said it would never do. It is no wonder that people evade tax on such a grand scale sometimes deliberately, sometimes innocently when the experts are not sure of how to treat certain items. Being Secretary to a number of Sport & Social Clubs I have had to deal with HMRC a lot over the last few years as the are seen as an easy target to get funds in for the revenue. During the discussions over whether certain type of fees are vatable or the money out the pool table or ticket money for socials, it is clear to me that every inspector has a different view on it and is not sure himself. And we as advisers are supposed to give guidance and recommendations based on this?

  8. Tim Harrop-Griffiths 1st November 2011 at 8:02 am

    What will be the position when advising on Group Personal Pensions if the fee was being deducted from the fund/contributions?

    Will be expected to charge those who engage our services differently from those who opt for a default option?

  9. A thought in passing – it is interesting that HMRC shouldhead towards implementing a regime which is the diametrically opposite of the regime they use for Insurance Premium Tax. (IPT).

    Whether it is insuring your house, your car, your office, your UK wide network of retail shops. your distribution centres, or your factories, you can seek the advice of an insurance broker, who will gather information about the customer; carry out research on suitable insurance options; provide the customer with reports, product health checks by way of exclusions from cover; and advise the customer on the best options.

    No IPT is payable during that potentially lengthy process, no IPT – until the premium is paid.

    Different strokes for different folks?

  10. Errrr!

    What about the Money Advice Service. It is purportedly providing “advice and guidance” on financial matters, will this now have to be a fee based service?

  11. Free advice is VAT free? Dont count on it! Do you remember when VAT was introduced on hot food and the chip shop guy started giving free fish and chips to anyone buying his rather expensive, but vat free salt and vinegar?
    Sooner or later the VATman will cometh and judge that all that free advice actually had a value that happened to be paid for through the investment advice. He will want the VAT on it and it will be too late to get it from the customer.

  12. Does this mean that VAT will be charged on trail on, for example, OEICS? We’ll be receiving an ongoing fee from the OEIC provider, reviewing the investment for the customer and then, where no rebalancing takes place, it seems from reading this that VAT might be due. Do we then send a letter to the client to say “I’ve reviewed your policy, nothing needs changing, but you need to send me some money to pay the VAT”? Sounds like madness. I hope I’ve got this wrong??

  13. Is it just investments or all financial transactions in which advice may be involved? How about a fee for mortgage advice and the lender refuses the case, at what point in the conversation do you drop in that as well as not getting the mortgage the client also owes HMRC another 20% of your fee? Investment, mortgages, trail or whatever it all points to HMRC guidelines making rather a strong inventive (for the client) for advice being contingent on a sale being made, oh dear, what a mess – again!!

  14. As soon as the government, in all its forms, becomes involved in anything, the layers of bureaucracy begin to build and with it complexity and uncertainty. This is the great job-creation scheme whereby more tax inspectors, more FSA staff, more lawyers and more civil servants are needed to manage the confusion that has been created.

    And who benefits ? certainly not Joe Public.

    We need a revolution to get rid of all these people who do nothing and yet cause so much chaos and work for everyone else.

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