Last week, I began to look at the implications of the latest guidance issued by HM Revenue & Customs and the Association of British Insurers on adviser remuneration and, in particular, at the guidance given in the first two diagrams (A and B) of three flow charts dealing with a payment that contemplates an upfront service.
Diagram A considers payment to the adviser made wholly or partly by commission, chart B looks at payment solely through adviser charging.
Figure C in the guidance note (dealing with the VAT treatment of the payment for an ongoing service only with the cost paid through adviser charging and not through commission) makes it clear that if the payment in question is not for an ongoing service that is an ancillary part of an existing single contract for both initial and ongoing services not liable to VAT then it will, in most cases, be necessary to determine whether a financial product was bought as a direct result of the ongoing service.
If it was not, VAT will be payable. If a product was purchased as a result of the ongoing service then it will be necessary to determine whether there was a separate charge for arranging the product. If there was, the cost, albeit being paid through adviser charging, will be VAT-exempt and any other charge will be subject to VAT.
If there was no separate charge for the product purchase, it must be determined what the predominant service provided was. If it was advice, VAT will be charged on the whole cost, whereas if the predominant service was arranging the product, the entire cost would be VAT-exempt.
To reiterate, the important first question to consider in diagram C is whether the ongoing review service paid for by adviser charging as an ancillary part of a single contract for initial and ongoing services is not liable to VAT.
All factors must be considered to establish the nature of the predominant service being provided under the terms of the contract in order to determine the correct VAT treatment of the supplies
This ’VAT-happy’ position will only be achieved if, according to note D, there is a single contract where the predominant service provided was arranging the purchase of a VAT-exempt financial or insurance product and that contract provides for ongoing review services to be carried out as an ancillary part of the contact. In this case, the total consideration paid in respect of services provided under that contract will be VAT-exempt.
If, however, the ongoing review services are the predominant element within the terms of the contract, the total consideration paid for services provided under that contract will be subject to VAT as a single supply of advice.
In each case, all factors must be considered to establish the nature of the predominant service being provided under the terms of the contract in order to determine the correct VAT treatment of the supplies.
To be exempt under a contract for predominantly exempt product arrangement services, payment for all services (that is, both the arranging and ongoing review services) must be made at the time the contract is entered into and the nature of the review services to be provided (ie. exactly what services the customer will be provided with and over how many years) must be clearly laid out in the contract.
This requirement for the payment to be made at the time the contract is entered into in order to be exempt appears to be only in relation to adviser charging, not where all or some of the payment is made by way of commission.
Flow chart C represents the most complex of the situations envisaged and dealt with by the guidance note.
As stated above, it applies where the payment in question is for an ongoing service and where the payment is made wholly by way of adviser charging, as opposed to commission.
If there is any part of the payment made for services (initial or ongoing) that is represented by commission, only diagram A is relevant.
Next week I will consider diagrams A and B in connection with services which, in the case of A, include an initial upfront service and B, is only for an initial up-front service.