VAT on chargeable services still ironing out
One of the most persistent and confusing issues to come out of RDR for advisers working through their charging strategies has been the application of VAT − or not − to their chargeable services.
The key element in determining the VAT treatment of services in the context of RDR is distinguishing between advice and intermediation. For VAT purposes, general financial advice does not mean the same as ‘advice’ for regulatory purposes.
There are two separate strands under general VAT principles:
• Charges for advice-only services without any specific link to the purchase of a product will normally incur VAT;
• Fees for providing an intermediary service are VAT exempt.
The role of the intermediary is to bring together clients seeking to receive financial services and organisations and individuals providing those services. So, if the adviser “acts between the product provider and the customer with a view to arranging the sale of a retail investment product”, that service is exempt from VAT, as long as there is sufficient evidence to show this.
HMRC’s guidance is that supplying a client with product provider material or information on products does not fulfil a sufficiency test for intermediation. There needs to be firm evidence that the client entered into the relationship with the intention of buying a retail investment product as a result of personal recommendations made by the adviser.
The normal six-stage client advice process is:
1. Complete a fact-find.
2. Carry out research to find suitable options.
3. Produce a client report.
4. Recommend specific products, including premiums/investment amounts.
5. Act between the product provider and client, with a view to arranging the sale of the retail investment product.
6. Where applicable, monitor the client’s ongoing situation to ensure continued suitability.
As long the adviser completes stage 5, whether or not a product sale is actually concluded, the service provided will be exempt of VAT.
Charges will be subject to VAT at the standard rate where there is no evidence of any product arrangement services. VAT will also be chargeable if one or more of the advice stages are contracted for under a separate agreement − where the service provided for the client is characterised as “general advice or recommendation only”.
So if a client requests advice on how to mitigate the potential IHT liability on his estate, an adviser might produce a generic solution based on the use of life assurance bonds written in trust. If the adviser makes no specific product recommendation, they will have to charge VAT on their fee.
However, if the adviser contacts product providers, is supplied with illustrations for the client and then makes a specific recommendation detailed in a suitability letter, this would be classed as intermediation (regardless of whether the client agrees to proceed), so the transaction is VAT exempt.
It is “what is done by the adviser, according to HMRC guidance, which is the determining factor on whether the charge for the advice is exempt or chargeable.
GAAR hoves into view
Legislation creating the General Anti-Abuse Rule (GAAR) is in the Finance (No 2) Bill 2013 and will take effect for arrangements established from the date of Royal Assent, likely to be in mid-July.
The ‘double reasonableness’ test is the key to the GAAR: for an arrangement to be considered abusive under the GAAR, HMRC must show that the arrangement “cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances … ” (s204 (2)).
HMRC issued revised guidance in April 2013 including some interesting examples. Inevitably it carries the caveat that any consent should not “be taken as indicating HMRC’s blanket acceptance or approval of all transactions or arrangements of a similar type − or as in any way limiting HMRC’s ability to counteract using other means.” Bearing that in mind, there are some nodded-through arrangements that are especially relevant to financial advisers.
• Gifts between spouses shortly before death (CGT): HMRC’s example outlines Mr Jones’ gift of shares “standing at a significant gain” to his terminally ill wife who dies five months later, leaving the shares to her husband in her will.
Although “the main purpose of the arrangement is to obtain a tax advantage”, HMRC accept that it “can reasonably be regarded as a reasonable course of action in relation to the tax provisions having regard to all the circumstances.” This would apply even if the gift had been made on the day of Mrs Jones’ death, assuming that the gift was validly completed.
• Rysaffe pilot trusts for wills (IHT): This example involves establishing settlements on successive days to avoid the related settlements rules. The settlements would generally be of small sums − say £100 each − with more substantial funds added on death. HMRC challenged the principle in the case of Rysaffe Trustee v IRC , which they lost. The guidance says that “HMRC … having chosen not to change the legislation, must be taken to have accepted the practice.”
• Discounted gift schemes (IHT): “Creating two distinct funds or a carve out may be considered contrived” according to HMRC and in 1986 legislation was “introduced to stop shearing arrangements in relation to certain carve out schemes over land”, which means that GAAR must be considered.
However, HMRC say that these arrangements fall outside GAAR because of a House of Lords decision on carve-outs and the fact that the arrangements are established practice.
What the examples outline is that long established practices that HMRC have not challenged, or have fought and lost in Court, are generally acceptable. However, as the nine variants on the use of loans to purchase property by a foreign domiciliary show, the more convoluted the scheme, the greater the likelihood of falling under GAAR scrutiny.
Where there’s a will − intestacy rules finally changing
After a long journey, consultation closed on the draft Inheritance and Trustees’ Powers Bill on 3 May 2013. The Bill will give effect to recommendations originally laid out in the Law Commission report, ‘Intestacy and family provision claims on death’, issued in May 2011. The subject has been in and out of the headlines since the Commission began work on these areas in 2008, publishing an initial consultation paper in 2009.
The Bill will generally apply to England and Wales only. Its main highlights are:
• The assets of a couple married or in a civil partnership should pass on intestacy to the surviving spouse/partner in all cases where there are no children or other descendants. Some assets now can end up in the hands of parents or siblings for estates over the
£450,000 statutory legacy level.
Where the deceased is survived by a spouse and children or other descendants the sharing of assets on intestacy should be simplified. The current surviving spouse life interest trust for half of the estate over £250,000 should be replaced by an outright payment.
• Children who suffer the death of a parent should be protected from the risk of losing an inheritance from that parent in the event that they are adopted after the death. Under the current rules, adoption before age 18 (or marriage/civil partnership) means any contingent interest is lost unless court action is taken.
• Making a claim for family provision should become easier for dependants of the deceased and anyone treated by the deceased as a child of their family outside the context of a marriage or civil partnership. The existing rules require the dependant to show that the deceased contributed more in financial terms to the relationship than the dependant did and assumed responsibility for maintaining the dependant. The Bill proposes to scrap both these provisos and prevent claims failing in cases of mutual benefit.
• A claim for family provision should be possible in certain circumstances where the deceased has died ‘domiciled’ outside of England and Wales but English law of succession applies to any part of the estate. The consultation offers three different definitions of domicile for consideration, although the Bill as currently drafted includes only the version with the widest scope.
• Trustees’ statutory powers to use income and capital for the benefit of trust beneficiaries (subject to any express provisions in the trust instrument) should be reformed. The 50% maximum advancement rule should be scrapped and there should be explicit provision to transfer non-cash assets, including property.
The Impact Assessment issued with the draft clauses estimates that there were about 220,000 intestate deaths in England and Wales in 2011, with over 2,000 family provision claims made between 2005 and 2011. The Bill will therefore have a significant impact when it becomes law, although some of the provisions will achieve no more than what much of the public believes to be law already − especially about dying childless. The only potential downside to these reforms is that they may encourage more people to think that making a will is not entirely necessary.