Less than three months before the start of the RDR it is troubling to hear industry leaders calling for clarification on important charging rules.
The concern centres around a change in the interpretation of HM Revenue & Customs guidelines on whether to apply VAT to ongoing advice services.
HMRC released its final VAT guidance on adviser charging earlier this year. It set out that when a client seeks the arrangement of a product, and follows a six stage process, the advice will be VAT-exempt.
This process includes a fact-find, researching investments , providing reports, financial health checks and forecasts, recommending and arranging products and, where applicable, monitoring the client’s ongoing position.
The guidance said VAT liability of ongoing services will depend on the services the customer has agreed the adviser should perform. This was widely interpreted as meaning ongoing services would be VAT-exempt when agreed as part of the original advice process.
However, recent HMRC communication suggests this is wrong. The Government department is blaming the industry for misinterpreting its guidance and suggests “it is difficult to see” how advisers’ ongoing portfolio reviews can be considered VAT-exempt.
Whether misunderstood or badly drafted, it is hard to understand why HMRC, which should have been aware of the way its rules were being read, has kept so quiet on the subject.
Understandably, tax experts advising IFAs on the basis of the original interpretation are unhappy while many firms are unable to finalise their future charging plans.
The Personal Finance Society has been battling to get clarity from HMRC and published a number of examples last month to aid advisers, based on extensive discussions with HMRC. On ongoing advice, the PFS guidance suggests if no further action is needed after a review, the advice is likely to be VAT-able but rebalancing would make it VAT-exempt.
When asked about concerns that its guidance could encourage churning, HMRC says this would be a matter for the FSA. The regulator will not comment on what it sees as a HMRC issue.
Ten weeks until RDR implementation, these type of grey areas should not exist. Advisers need definitive guidance on when they should be charging VAT.
The HMRC needs to come out and publicly back the guidance issued by the PFS or suggest amendments. Firms need certainty that they are doing the right thing and won’t be stung by the tax man a few years down the line.