View more on these topics

Taxonomy of tax

Only once the concept of intermediation has been properly defined can we start to understand what is VAT-able

If you have ever wondered why IFA fees are treated differently from many other professions, it is because the European Union decrees VAT should not attach to the sale of insurance and financial services products.

The foundation of EU VAT law is set out in directive 2006/112/EC, with the exemp-tion for financial services at article 135. Schedule 9 VAT Act 1994 has enacted this into UK law. We also have case law from the European Court of Justice and our own courts.

Financial advisers have to interpose the British IFA system within the wider diktat of VAT law from Europe. The UK cannot make unilateral changes or introduce new laws for IFAs. Similarly, HM Revenue & Customs cannot interpret VAT legislation in a manner contrary to EU law.

In 2007, the European Commission declared the current VAT directive in need of revision and said there should be greater clarity as to which elements of financial services are exempt. It proposed some profound changes that, in my opinion, would make things clearer but these have not been adopted.

If we take VAT law and place into this the scope of the potential work undertaken by IFAs, we can see the problems.

If IFA work never made mention of a financial product, it would all be VAT-able. Conversely, if IFA work was simply placing investment products, it would all be exempt.

It is often said advice is VAT-able but intermediation is exempt. This is an understandable divide but misses the point. The law says anything that is intermediation is exempt and anything that is not intermediation is VAT-able.

This sounds pedantic but using the word “advice” blurs our thinking. The pivotal issue we need to agree with HMRC is what is intermediation.

One might argue intermediation is simply the arranging of a financial product but it means a lot more. A mediator stands between the parties to a financial product and intermediation means any activity that may alter the rights of the parties and could lead to a product being created, continued, altered or ended.

Equally, the provision of advice that reflects specialised knowledge of the financial product is mediation of it.

It is not necessary that a product be started or ended but that the activity relates to some form of mediation. This wider definition would mean any activity (advice) you provide in connection with a financial product is exempt, irrespective of whether there is a buy or sell transaction.

Only once the question of what is intermediation is properly answered can we start to understand what is VAT-able, what is exempt, what our taxable turnover is and where the predominance rule sits. We need VAT guidance that is fair and clear to comply with tax law and to establish and operate informed charging models.

I do not want to see the public face a 20 per cent increase in the cost of advice, nor do I want to see VAT influencing client actions – encouraging unnecessary moving of investments to show a product sale to avoid VAT or discouraging appropriate movement of investments because it has VAT-exempt trail commission.

We also need to prevent inconsistencies within the industry and at a local tax level.

HMRC will produce draft guidance later this year, which will then enter a period of consultation before final guidance is issued in 2012. If you have questions, now is the time to submit them to the various parties working on this or to us at fwd@

We will not overcome VAT issues by using artificial tags, labels or contract conditions. VAT law works on the facts of what you do, not on what you say you do.

Paul Kennedy is head of trusts and tax planning at Fidelity International


JP Morgan mulls low-cost fixed income

JP Morgan will consider launching a low-cost fixed-income active fund when the company expands its lowcost active range. In February, the firm launched a low-cost active offering, the JPM UK active index fund, which aims to outperform the FTSE All-Share index. Head of sales Jasper Berens says the firm will “undoubtedly” launch more low-cost active […]


FSA provides clarity on platforms and independence

The FSA has provided a more detailed explanation of when advisers can call themselves independent  while using one or more platforms. In its policy statement on platforms published today, the FSA says although platforms currently have access to a wide range of collective investment scheme funds, they tend to offer a more limited range of […]


Top rate of income tax could be cut to 45p

The Government is considering cutting the top rate of income tax from 50p to 45p as early as next year, according to reports. Quoting “Government sources” the Independent says the move, affecting those earning over £150,000, could be unveiled in next April’s Budget. According to the report, a senior Conservative says: “The decision is not […]

Skandia UK profits down due to policyholder tax smoothing

Skandia UK’s pre-tax profits slumped 29 per cent from £75m in the first half of 2010 to £53m this year, interim results reveal. Skandia says the decline is “solely” due to a lower profit from smoothing of policyholder tax on the firm’s unit-linked policies. It says this resulted in a benefit to the firm’s accounts […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm