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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.

Last week, the PFS published its latest Professional Direction paper. 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 a 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. 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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