Shortly after the RDR was announced, HMRC and various industry bodies agreed that there would be merit in issuing guidance on VAT, which led to the guidance published in March that now forms part of HMRC’s manuals.
It confirmed intermediation (whether or not this led to a product sale) is exempt from VAT but standalone advice is liable to VAT. With regard to ‘ongoing services’ (e.g. annual reviews) exemption would apply where these services were agreed as part of the initial contract, otherwise they would be liable to VAT unless they formed a step in a separate intermediation process.
Then, a few weeks ago, some disconcerting comments emerged from HMRC with their view now seeming to be that ongoing services would be liable to VAT regardless of when they were agreed unless they formed part of a distinct intermediation process. .
Thankfully, HMRC have now reverted back to the original position on ongoing services outlined in the guidance: where a customer opts for a periodic review at the time of entering a contract for the purchase of a financial product, the review is an ancillary part of a single exempt supply of the product.
However, this is by no means the end of the story. In order to qualify as VAT-exempt, the ongoing service must be “a relatively minor element of the overall supply”. They imply this will be by reference to cost or what is provided overall in the transaction (presumably on a time spent basis).
But these are not necessarily the only, or even the best, measures in determining whether the ongoing services constitute part of a single exempt supply. VAT case law (most recently the Bloomsbury Wealth Management case) confirms the intention of the customer is a key factor.
In the vast majority of cases, I would expect the intention of the customer is to buy a financial product to meet their needs: the purpose of the review being to ensure that those products continue to meet those needs and identify any necessary changes. Or to put it into VAT speak, the review does not constitute an aim in itself for the customer but a means of better enjoying the principal supply.
The latest correspondence also suggests that HMRC now recognise there is a distinction between IFA review services and portfolio management provided by DFMs. The inference I draw is that HMRC see IFA review services as something provided ‘periodically’ whereas portfolio management is something provided on an ‘ongoing’ basis. Again, assuming I am reading this correctly, this is a welcome distinction but confirmation would be helpful.
How should an IFA differentiate between a rejected recommendation (which would attract VAT) and an aborted transaction (which is exempt)? What is a reasonable gap between a recommendation being given and a customer agreeing to the transaction – six months, nine months? Does the adviser have to charge VAT upfront and then seek a credit if the customer decides to accept the recommendation outside this timeframe? Also, what form of evidence would advisers be required to keep in order to justify the VAT treatment they apply?
The problem still remains that having a situation where VAT is chargeable unless there is intermediation is an open invitation for churning products. If a customer realises that advice alone could cost an extra 20 per cent, they may wish to authorise a transaction (and, of course, they could abort it later and retain VAT exemption!). Is this really what RDR is about?
So, with just over two months to go, it’s still a bit of a mess. Let us have some clear guidance, written in plain English, so at least advisers can all start on the same page.
Mark Chesham is director of indirect tax services at Moore Stephens