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Tony wickenden

In weeks gone by, I have written (hopefully usefully) about some of the tax implications of the impending possible changes to the landscape of the distribution of financial services products and the giving of financial advice in the UK.

Recent reports of potential conflict between the proposals (particularly that of the defined-payment system) in CP121 regarding the conditions as to the method of remuneration to be satisfied before the designation “independent” can be used and the proposed provisions of the EU&#39s investment services directive, which is being consulted on and may permit IFAs to receive remuneration by way of commission and still be designated independent, may yet have some impact on the outcome.

Be this as it may, this week I would like to look in particular at the VAT implications of receiving commission, charging fees and rebating commission or reducing fees by the amount of commission received. Regardless of what may emerge from the whole CP121 debate, the issue of VAT needs to dealt with by anybody charging fees as a means of being remunerated for advice they to their clients.

To the extent that a fee is charged for financial advice, the basic position (and this is understood by most financial advisers) is that the fee is chargeable to VAT if the adviser is registered for VAT. The current taxable turnover threshold for VAT registration is £54,000.

It is worth noting that VAT is an EU obligation and that, in cases of conflict, EU law takes precedence. With this in mind, the UK rules on VAT need to be looked at in conjunction with Article 13B of the sixth directive, which provides that certain supplies shall be exempt.

These include insurance transactions and related services provided by insurance brokers and insurance agents. Fees charged for giving financial advice are not exempt.

Herein lies a potentially immense issue to be addressed by any adviser considering a wholesale switch to being remunerated by fees. Whatever outcome emerges from the CP121 debate, early evidence seems to indicate that many advisers are not contemplating this move for their whole business. Some are considering a split of their business and some considering adopting the authorised financial adviser route so as to maintain the widest choice of products for their clients while still being remunerated by commission.

After all, it is what most clients seem to prefer. Also, when you take account of the possible VAT implications of doing otherwise, it is hardly surprising that many advisers prefer the commission route.

CP121 also gives rise to a number of as yet unresolved issues regarding VAT, some of which I will attempt to highlight. IFAs whose turnover of non-VAT-exempt income exceeds the threshold must register for VAT and registration for those with non-exempt income of less than this amount is optional. It is generally accepted that commission payments are exempt from VAT. However, it is not the commission itself that is VAT-exempt, it is the underlying supply that must qualify for exemption.

The legislation providing for exemption is contained in Schedule 9, Group 2, Item 4, VAT Act 1994. Here it is stated that “the provision by an insurance broker or any insurance agent of any of the services of an insurance intermediary in a case in which these services are related to insurance (including pensions) is an exempt activity”.

For the purposes of this exemption, an insurance intermediary is defined as a person involved in: “bringing together, with a view to the insurance of risks, of (i) persons who are or may be seeking insurance and (ii) persons who provide insurance”.

As stated above, the key to this exemption is the nature of the supply, not the character of the payment, even though in most cases an exempt payment will have the character of a payment of commission.

As well as insurance services, the provision of intermediary services in relation to shares, stocks, bonds, units, and so on, by a person acting in an intermediary capacity will be an exempt supply under Schedule 9, Group 5, Item 5, Note 5, VAT Act 1994.

In this context, intermediary services are defined as “bringing together (with a view to the provision of financial services), of (a) persons who are or may be seeking to receive financial services and (b) persons who provide financial services”.

In the light of these exemptions and remembering that it is the nature of the supply and not the character of the payment that qualifies for exemption, it is strongly arguable that fees received in respect of the exempt supply could also be exempt if the fees are paid for the purposes set out in the provision for exemption, that is, the provision of (defined) intermediary services as defined above as appropriate. Exemption or otherwise would then clearly depend on the facts of each case.

If the fee is paid for advice and is determined without regard to any financial product, effected or not, then it is hard to see how the exemption can apply.



“Definitely, yes, to make sure people are giving genuine reasons for a transfer and are not taking full commission when a transfer is taking place.”Jeremy Newbegin, The Ethical Partnership“I don&#39t know. I don&#39t see any reason why they should do.”Alan Shackcloth,AG Shackcloth & Co“If, at the end of the day, it will help everyone, then […]

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