Professional bodies have welcomed HM Revenue & Customs’ latest draft RDR guidance on VAT liability, which suggests the advice process will be exempt from VAT for most advisers.
Draft guidance last October suggested that advice becomes VAT-exempt where the client agrees to go ahead with a product sale but revised draft guidance, revealed in last week’s Money Marketing, says the VAT exemption will be determined by a “gateway” entry into the intermediation process rather than the intention to execute a sale.
The new draft guidance sets out the stages of the advice process as the fact-find, researching suitable investment options, providing customers with reports, financial healthchecks and forecasts, recommending and arranging products, and where applicable, monitoring the customer’s position on an ongoing basis.
It states: “Where the customer has agreed to the arrangement of a retail investment product and the adviser performs the necessary services, as outlined above, regardless of whether the sale is finally concluded, and they are able to evidence that they have done so, no VAT will be due on any charges made to the customer for these services.”
Under the original draft guidance, ongoing advice such as annual reviews were said to be liable for VAT but the revised guidance suggests this too would be exempt if the client agrees for these services to be carried out.
References to portfolio advice services, branded as contradictory by the FSA, have been dropped from the new guidance. References to discretionary investment management have also been dropped pending a test case at the European Court of Justice.
Personal Finance Society chief executive Fay Goddard says: “The latest guidance is much shorter, sharper and cleaner. We are quite pleased with the outcome, as the points we had addressed have either been removed or clarified.”
Institute of Financial Planning chief executive Nick Cann agrees the position is now clearer but he urges IFAs to ensure their tax treatment of advice is consistent with their marketing material and client agreements. He says: “We would urge advisers to be cautious about how they are marketing and presenting their proposition and whether that looks sensible to HMRC.
“If an adviser is marketing themselves as focusing on holistic advice and life planning but not charging VAT because products are involved, they are exposing themselves to risk.”
Aifa policy director Chris Hannant says advisers who have been charging VAT on non-VATable services are unlikely to face problems, as long as they were doing it in good faith.
Goddard believes an education exercise is necessary for some advisers who are wedded to the idea that being fee-based means VAT is payable.
Both Goddard and Cann recommend advisers in doubt about the tax position of their business to seek advice from an accountant or HMRC.
Cann says: “It is too important to guess at. Even if the advice turns out to be wrong, HMRC will look more favourably on the fact that professional advice has been sought on the issue.”