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agrees to take out an investment product following adviser recommendations will be exempt from VAT post-RDR under draft guidance published by HM Revenue & Customs.
HMRC published the draft guidance today on when advice given after the RDR is liable for VAT.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.”