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PFS gets VAT clarity on ongoing reviews and DFM referrals

HMRC 450

The Personal Finance Society has clarified when ongoing reviews will be subject to VAT and that referrals to a discretionary fund management service are taxable following extensive talks with HM Revenue & Customs.

The PFS has published its latest Professional Direction paper on VAT and adviser charging ahead of an RDR conference today where the paper will be discussed.

It sets out HMRC’s final guidance on VAT and adviser charging, published in March, which says where the customer seeks the arrangement of a retail investment product and the adviser carries out a six-step advice process, advice will be VAT-exempt.

It lists the six stages as a fact-find; researching suitable investment options; providing customer reports, financial healthchecks and forecasts; recommending products; arranging products and, where applicable, monitoring the client’s ongoing position.

The PFS paper includes practical examples of what the VAT position is likely to be based on certain outcomes.

The examples demonstrate where intermediation has taken place and action is taken on the basis of recommendation, the service is likely to be VAT exempt. If a client agrees to take out a product but then does not proceed, this would be classed as an aborted transaction and still be exempt.

The PFS gives the example of where a client receives an adviser’s recommendation, which the client pays a fee for, but then takes no action, and the adviser makes no further contact with the provider.

It says it is likely this would be VAT-able because the adviser has not “acted between the product provider and the customer” with a view to arranging a sale. The PFS says: “Contacting a provider in order to provide information or an illustration to the customer is not a VAT exempt act of intermediation by itself. There needs to be evidence that the adviser has begun intermediating the sale of the exempt product with product provider on behalf of the client.”

On the VAT treatment of ongoing services, the PFS says if after a review the adviser recommends no further action is needed, this is likely to be VAT-able.

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

The PFS has also reminded firms to monitor their taxable turnover in light of the current £77,000 VAT registration threshold, and include taxable fees such as fees for referring to DFMs.

The PFS says: “Regardless of how it is remunerated, there is no exemption for the introduction of the client to a discretionary investment service because discretionary investment management is a taxable service that does not fall within the financial services exemptions.

“It is not correct for IFAs to look through to the selection and purchase of VAT exempt assets by the discretionary investment manager and treat their services as exempt introductions to a series of VAT exempt transactions.”

In August the PFS called for clarity from HMRC on the grey area of VAT treatment of regular advice reviews and discretionary services.

HMRC is to consult with the industry on the VAT treatment of DFM services following the European Court of Justice’s ruling that the entire DFM service is VAT-able in a German test case involving Deutsche Bank in July.

Philip J Milton & Company managing director Philip Milton says: “It comes down to intent. From an exemption perspective, you almost want the customer to come in and say they want to buy a product. What I am fearful of is that the VAT man ends up making judgements after the event, by which point it is too late to do anything about it.”


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There are 15 comments at the moment, we would love to hear your opinion too.

  1. Still too may “likely to be’s'”. If’s, but’s and maybe’s seem to be the order of the day with HMRC.

    And the FSA say this is to improve consumer outcomes. The only outcome I can see is that advice will become more expensive.

  2. The important thing to realise here is that one of the main aims of RDR was, always, to extract more money from the industry (albeit the client will pay).

    Add VAT to the massive cost of the extra regulatory burden imposed over the past 10 years (even before RDR), is it any wonder that Joe public is still paying dearly for investment and pensions advice ?

    Call me a cynic if you like !

  3. VAT will kill off the ongoing servicing of clients. Another good example of the FSA’s unintended consequences.

  4. Madness. How can you run a business where you cannot tell the client upfront what the tax position is?

  5. Sadly this article is misleading which is the problem with the whole business of VAT. The critical issue is the intention at outset. You can make recommendations and the fee can still be non VATable.

  6. Some real issues raised here. Firstly, if a client is to pay for a review, the adviser will not know if it is VATable before the meeting! Pure advice would be but if you recommend a product it isn’t. Very difficult to tell the client the price in advance! What about retainers or annual service fees?
    It matters little whether you are or are not registered for VAT-you still need to show what is VATable and what isn’t in order to defend your position with HMRC.
    Accounting software needs to be very sophisticated and we are just about to launch the complete Pratice Management Software which can handle these situations. It will also reduce your FSA fees in certain circumstances! Contact for more info.

  7. I have posted this elsewhere but it is important that this reaches a wider audience because the guidance from HMRC and the PFS are setting alarm bells ringing. Financial advisers (as opposed to plan sellers) often intermediaries but they do not know whether they are at outset. So with careful wording in the client agreement VAT has been avoided. Which is why the word intent is vital and the fact that it no longer appears is worrying.

    What the PFS guidance appears to say (based on HMRC Guidance) is that now you must physically submit an application to a provider to be exempt from VAT but I have never seen this in any VAT guidance notes pre RDR. HMRC has always said that nothing has changed and its revised guidance is to clarify the situation in a post RDR world yet now activity 5 (in the HMRC guidance) has to be carried out to be VAT exempt even if the plan is not completed. VAT exemption is now defined as actually submitting an application form. In other words, it is saying that what the adviser actually does determines whether VAT is payable and not the intention at the initial meeting. However, the adviser simply does not know what he will do at outset and it is only in retrospect that they know whether VAT should have been payable.

    We could agree with the client at outset that we will sell an ISA , complete the application form, cancel it and save the client VAT. Alternatively we say to the client unless we are going to submit an application they will pay VAT!

    There is no way we can tell the client whether VAT is payable at outset until after we have advised then and carried out actions 1-4 with a view to carrying out 5-6.

  8. Thank goodness, now it’s all clear and everyone can move on…

  9. So, under TCF guidelines, persistency levels plummet as clients are advised of how to save VAT if they do not wish to proceed (i.e. take out plan and then cancel it).
    This results in more work for the FSA as they then have to investigate why persistency rates have fallen. Job done.

  10. I would like to take the opportunity to point out that the PFS has sought only to provide some much needed clarity around the HMRC’s rules.

    We were aware of the confusion around VAT and of the wide range of differing interpretations that the adviser community had expressed. Following lengthy engagement with HMRC we have published a paper that seeks to provide advisers with real-life examples of how the new VAT rules will work.

    It is important to acknowledge that this paper is NOT just our interpretation of the rules but actually the HMRC’s interpretation of their rules

    For the record the PFS was not actively involved in the development of the rules themselves – we are not a trade body.

    David Ross

  11. It is alarming that HMRC have no idea of how we work and indeed the PFS may have been repeating what HMRC say. However, a professional body like the PFS/CII should have questioned this guidance and said how the heck are real world advisers going to do that? It is unworkable. The other trade bodies should be condemned for failing to get the message over to HMRC, but had I read the final guidance (as opposed to the draft guidance) and then questioned the almost universal view that nothing will change I would have screamed at the HMRC.
    Anyhow I have contacted the FSA for clarification as to how we ensure that we charge VAT legally, comply with money handling rules, TCF principles and Adviser Charging guidance.

  12. Ok, so I give a client investment advice and I provide an agreed ongoing service where I receive £1,000 per annum through adviser charging from the product. Fast forward a year and I do an annual review and make recommendations to rebalance and/or switch funds, thereby completing steps 1-4 . Presumably at that stage I will need to put in my report that if the client does not proceed with my recommendations, they have to write out an additional cheque for £200 just to cover VAT. Might the client feel pressure to go ahead with something that they perhaps don’t want to, purely because they don’t want to cough up £200 of their hard earned money? Might this lead to customer detriment?

  13. Unfortunately, it is up to business to decide how best to interpret tax rules and from what I understand from clients who are VAT registered and not in Financial Services, we are getting considerably more guidance than most industries do.

    The FSA can’t clarify the rules relating to VAT because they don’t have anything to do with the rules relating to VAT. they could say “this is how it works” and if HMRC disagreed, what the FSA said wouldn’t help at all.

    Its a right old mess really.

  14. The FSA has to. We are unable to comply with the FSA rules so the FSA has to give some sort of guidance or seek formal guidance from HMRC. I think the term is double jeopardy? For most industries VAT is quite clear and until the final rules came out VAT was quite clear in our profession. The word intent needs to be introduced.
    Interestingly the PFS promoted a presentation from ICAEAW on VAT and adviser charging and it is interesting to see how the points made in that presentation are at variance with thier clarification.

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