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Stirring the VAT

Guy Anker looks at the confusion over VAT on retention proc fees

The Treasury has confirmed that brokers may have to pay VAT on retention procuration fees but says this only applies if they do not do their jobs properly.

It says that if a broker only recommends that a client remains with its lender after assessing the market and does not have some further involvement in the deal, such as helping arrange and assist with the application, then it would be classed as a professional service and so would incur VAT.

But if the intermediary had that involvement in a deal by helping the customer, then the proc fee would be exempt from taxation.

The message to brokers comes after Association of Mortgage Intermediaries director-general Chris Cummings warned at Money Marketing Live last week that brokers may end up having to pay VAT on retention business.

The Treasury says the same rules apply to new and existing customer business. A Treasury spokesman adds: “The VAT treatment depends on exactly what service the broker is providing.”

Like the Treasury, the AMI makes it clear to members that they will only have to pay additional VAT if they fail to offer the full range of services to their customers.

That would mean lazy brokers that do not shop around for the best mortgage and do not help their client apply could get hit with a double-whammy from the taxman and the regulator, with the latter likely to take a dim view of any firm that is not treating its customers fairly by failing to search for the best deal available.

The AMI stresses that brokers must ensure they have kept adequate records to prove that they have done what they say they have.

Cummings says: “If brokers get commission on a retained product, then VAT may be payable. Currently, VAT is not applicable on active intermediation but if you are getting a client to stay, then it could be VAT-able as it could be classed as a professional service.”

A related issue is whether retention strategies are ethical and whether they discourage brokers to shop around.

Edeus managing director Alan Cleary, who has been a fierce opponent of retention schemes that pay full proc fees, claims that around £125bn could be wiped off the value of the mortgage market as he considers that retention strategies are designed to kill off the remortgage market.

Cleary says a fairer way for lenders to keep their customers is by offering the same products to new and existing customers, as Nationwide, Halifax and BM do.

Another idea put forward by Alliance & Leicester head of intermediary mortgage Mehrdad Yousefi in Money Marketing last month is to pay trail commission on mortgages so lenders share profit with brokers for every year the customer stays on its book.

Cleary says: “Since retention strategies have come in, £10bn has been wiped off the remortgage market by one lender. Some estimates say we will have £345bn market this year but it will be £220bn soon. What will the 25,000 mortgage brokers do then?”

A similar point about a shrinking market was made by Hamptons International Mortgages managing director Kevin Duffy last month, that brokers may have to find new income streams because retention business will make the mortgage market contract.

Hamptons has been a supporter of retention, especially after its technical director Jonathan Cornell described Halifax’s move to paying full proc fees on retained business in July as the “most exciting news for brokers this year”.

The schemes in question are those from Accord, BM Solutions, First Active, Halifax and Woolwich.

What may help in the debate on whether retention schemes treat customers fairly would be a statement for the FSA stating one way or another whether it is a problem or not but that has not been forthcoming.

The regulator makes it clear it is not about to start any thematic review or investigation into the matter to clear up confusion but says it is aware of the issue that a proc fee may be tantamount to an inducement. It refuses to say it has no concerns at all with retention schemes.

In its rulebook, MCOB rule 2.3.2 says: “A firm must take reasonable steps to ensure that it and any person acting on its behalf, does not offer, give, solicit or accept an inducement or direct or refer any actual or potential business in relation to a regulated mortgage contract to another person on its own initiative or on the instructions of an associate if it is likely to conflict to a material extent with any duty that the firm owes to its customers.”

HBOS said last week that the FSA is comfortable with its policies after detailed discussions between the pair, although the regulator does not comment on individual discussions with lenders.

Cummings says it is imperative that brokers are not tempted by the pound signs and continue to shop around. He says: “A lot of our members tell me they want longer-term relationships but my message to brokers is that if you are taking additional payments, please bear in mind that liability follows money so if you recommend a customer stays, then that is on the basis of a fair market analysis, otherwise it is a swift complaint to ombudsman, so make sure you keep records of your dealings.”

Cobalt Capital managing partner Julian Ingall says: “Retention had to be done and HBOS had to lead the market and I embrace them for that. There are TCF concerns but that sits with the broker and brokers must not forget that.”

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