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Intelligent Pensions slams PFS VAT guidance

Steve Patterson

Intelligent Pensions has criticised recent guidance from the Personal Finance Society on VAT and adviser charging as “nonsensical and impractical” and called for it be revised.

The PFS published its latest Professional Direction paper last week, which set out when ongoing reviews are subject to VAT and that referrals to a discretionary fund management service are taxable. The paper was written following extensive talks with HM Revenue & Customs.

The PFS says where an adviser carries out a review with a view to rebalancing a client’s portfolio, but following the review, recommends no action should be taken, this is likely to be VAT-able as although the adviser has liaised with providers, no intermediation has taken place.

If after a review rebalancing takes place, the service would be VAT exempt.

But Intelligent Pensions managing director Steve Patterson (pictured) says there are issues with putting the guidance into practice.

He says: “This seems nonsensical and quite impractical to implement. If an adviser’s annual review report recommends changes to the holdings, is the adviser supposed to go back and ask the client to pay the VAT later if the client elects not to follow the rebalancing recommendations? How long is the adviser supposed to wait for the client to decide whether to follow the rebalancing advice or not – a week, a month, two months? It is just daft.”

Patterson says an unintended consequence of the guidance may be that investors may request a change to their investments to avoid paying VAT.

He also believes the guidance contradicts the recent tax tribunal decision involving Bloomsbury Wealth Management, which ruled in favour of partner Jason Butler who was repaid almost £260,000 in VAT.

Patterson adds: “It is the fact the annual review is ancillary to the principal supply which makes the service charge for reviews exempt, not that further intermediation takes place in the form of a transaction.

“The client’s expectation of a regular review with advice on rebalancing makes that a part of the original supply, not a new and separate supply each year.”

The VAT story so far

August 2010: HM Revenue & Customs and the Association of British Insurers publish guidance reiterating that VAT is payable on advice and not products. It says where advice leads to a product sale, the adviser must determine which is the predominant service.

September 2011: Representatives from HMRC, the FSA, the Tax Incentivised Savings Association, Aifa and the Investment Management Association meet to discuss VAT under adviser charging. View from the meeting is that liability will be based on the intention of the service at outset.

October 2011: HMRC draft guidance states advice will be exempt where a customer agrees to take a product following adviser recommendations.

November 2011: The FSA warns draft guidance is contradictory as it suggests ongoing advice will be subject to VAT, ongoing advice, including portfolio rebalancing, will be exempt and portfolio advice services, where an adviser suggests particular transactions, will be subject to VAT.

February 2012: Revised draft guidance is sent to industry stakeholders suggesting entire advice process will be exempt from VAT for most advisers. Final guidance is published later the same month, confirming advice will be exempt where clients are looking to take out a retail investment product. References to discretionary investment management, deemed taxable in the first draft of the guidance, are dropped pending the decision on the Deutsche Bank test case in the European Court of Justice.

May 2012: Advocate general Eleanor Sharpston recommends entire discretionary management service should be VAT-able.

July 2012: HMRC says it will issue further guidance on VAT treatment of DFM services after ECJ confirms should be treated as one taxable supply.

September 2012: PFS publishes Professional Direction paper on VAT and adviser charging.


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There are 7 comments at the moment, we would love to hear your opinion too.

  1. It is totally ridiculous for the VAT rules to possibly influence the advice that is given.

    On occasions it may not be in the client’s best interest to rebalance a portfolio after taking into account dealing costs. And for the adviser “doing the right thing” and not rebalancing the client is “rewarded” with a 20% hike in their fees – crazy!

    Or putting it another way perhaps it is now always beneficial to
    rebalance a clients portfolio when you factor in the adverse consequences of VAT but it really shouldn’t have to be like that should it?!

  2. I can understand Intelligent Pensions frustration but the paper they refer to was drafted following lengthy discussions with the HMRC. It does NOT represent the views of the PFS but the HMRC’s interpretation of their own rules. They approved the document in full before its publication.

    Whilst I am sure Intelligent Pensions observations may have some merit the fact remains that this is the law and as such the PFS’s role here has been to provide clarity rather than to express an opinion.

    To put it simply, Steve, please don’t shoot the messenger….!

    David Ross

  3. it amazes me that we are regulated to provide clear and transparent advice to our clients and yet HMRC/Government cannot be clear on how VAT should be charged.
    How much longer must this confusion continue?

  4. I understand that David, but if the PFS intervention was an attempt to help, surely it would have been sensible (at the time your document was created) for you to point out to HMRC the ways in which this document contradicted previous guidance, in order to clarify which applies. The examples do not seem to follow the previous guidance regarding intention to intermediate and many of us are more confused now than before, which Im sure was not the PFS intention.

  5. John Joe McGinley 5th October 2012 at 1:39 pm

    I have to agree with Paul Harding this has just added to the confusion. More to run on this I am sure.

    If this is what HMRC are saying then it flies in the face of common sense.


  6. I can see people agreeing to changes to their portfolios just to save the VAT. That is not a good consumer outcome.

  7. Spot on James Hurdman. The FSA has confirmed that if the liability for VAT changes from the time the contract with the client was entered into then firms must go back to the client and charge VAT – or refund it. Steve Patterson’s fears are indeed reality. If a client does not agree to a portfolio change then you have to go back and charge VAT. Post 2012 you have to state what your charges are (adviser charging) net of VAT and point out that VAT will be chargeable if no intermediation takes place (app submitted in other words). These are the rules.
    Breaks TCF (consumer outcomes etc.) and is absurd. Also liable to wholesale abuse by the profession due as much to inconsistency and ignorance in applying the rules.

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