HM Revenue & Customs has clarified its stance on VAT relating to financial advice, confirming that advice which includes portfolio rebalancing will be VAT-exempt.
In draft guidance on VAT liability, published this week, HMRC states that VAT will not apply where a customer agrees to take out an investment product following adviser recommendations.
It states that ongoing advice, such as regular reviews, will be subject to VAT but if the ongoing advice includes portfolio rebalancing, then it will be exempt.
If the client takes advice and agrees to a transaction but for any reason the adviser fails to bring about the sale, the service up to that point will also be exempt.
However, if the client decides not to proceed with the recommendation, then VAT will apply.
Advisers will need to have evidence of the tax treatment of advice services through documents such as client contracts, letters of engagement and regulatory returns. If an adviser cannot show evidence of why advice was exempt, VAT will be charged on that service.
Ernst & Young partner David Bearman says: “The real challenge is that the tax decision will have to be supported by evidence produced by the client or taxpayer, which is an additional burden for IFAs. We would recommend that IFAs and insurers agree their approach and what is acceptable evidence in advance with HMRC.”
Informed Choice managing director Martin Bamford suggests most regular reviews will lead to rebalancing and therefore be VAT-exempt.
Personal Finance Society chief executive Fay Goddard says: “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.”