Not only do IFAs have regulatory changes to consider they also have the potential implications of IR35 to look forward to.
The Inland Revenue and the Government have for a long time been looking at ways of counteracting perceived avoidance of Schedule E & NIC. The attack at service companies and the newer extension to partnerships means that the very core of an IFA's business will need to be examined.
Networks and IR35
The structure of networks means that IR35 will be very interesting reading. The top company provides services to the AR companies and, likewise, the AR provides investment advice and services to its clients by virtue of the top company's authorisation.
The network company has control by virtue of the way in which the AR works. The AR contracts in most networks are littered with restrictions, dual authorisation and the ability to work elsewhere being good examples.
The income of the AR is paid gross, net of the override and management expenses of the network company. Under the new legislation, this may mean that the AR will become subject to the new IR35 tax payment systems.
The structure of the majority of the AR companies is that the directors are the shareholders. The next level deals with people retained to act as registered individuals via the AR. Once again, we are seeing structures set up to increase tax efficiency and to shelter income and NIC payments.
It is hig
hly likely the Inland Revenue will look long and hard at network structures and look to deal with them as a whole raft of service companies and bring them within IR35.
Directly authorised firms
Once again, the Revenue will, it seems, look closely at the way in which the businesses are structured.
If the business is run on the basis that the directors / registered individuals are paid under Schedule E on base salaries, then the effect of IR35 will be negligible. However, if as many practices do, you were to employ a quasi-self employment structure with people paid monthly based on what they earn, then IR35 beckons.
The effect on the industry
The effect will, to my mind, move people toward offering salaried packages to staff. The days of the totally self-employed adviser appear to be coming to an end.
Putting things into con-text, the drive for fee-based financial advice is something which IR35 is indirectly pushing towards.
The nightmare of indemnity commission, with clawback under an IR35 regime in another tax year, will cause all advisers headaches.
Reading between the lines, this scenario is so unattractive that I would be tempted to say that it acts as a disincentive to charge on an indemnity basis.
Being prepared for what could be a complete change in the remuneration of financial services is a priority.
There will be some structures which the Inland Revenue is going to find more acceptable than others.
My advice to network members is to seek clarification before the start of the new tax year in April.
My advice to people choosing to trade through a company as a means to shelter overall tax rates is to think long and hard about their business plans for the future.
Out of every potential downside comes a opportunity to discuss the changes with clients. Limited companies and partnerships need to receive advice so that they can put in place enquiries with their local tax office.
We live in a time of change and with that comes the need to plan. IR35, the FSA and stakeholder – roll on 2002.