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VAT among the pigeons

Continuing this week with the much misunderstood subject of VAT and financial services, I would like to delve into the murky waters of introducer commission.

Last week, I examined the rules for exemption from VAT in respect of intermediary services in connection with financial services products such as insurance and collectives. As I said, the rules on exemption are driven by the nature of the supply and not the character of the payment.

Despite this, however, it is probably true to say that commission payments to financial intermediaries by product providers for acting in an intermediary capacity will be exempt from VAT – which leads me to this week&#39s subject of introducer payments.

In a post-N2 environment that makes it harder for professionals such as accountants and solicitors to do financial services business without being regulated under the Financial Services and Markets Act, the attraction of introducing clients to IFAs is likely to increase.

It will be interesting (an understatement) to establish whether, in a post-CP121 world, it will be possible for accountants and solicitors to introduce to multi-tied or authorised financial advisers and not only IFAs. Of course, it will probably not be possible to establish this with any certainty until the shape of the categories of distributors of financial services products and advice is more clearly known.

Despite the initial feeling that there will be little movement away from the initial CP121 shape, recent developments within the investment services directives may well have a relaxing impact on the definition of “independent”. We shall see.

So how about introducer fees? Are they liable to VAT or not? The issue is dependent on whether the activity performed by the introducer is exempt or not. So, to use that great cop-out phrase – it all depends.

There have been a number of interesting VAT tribunal decisions giving guidance on what constitutes the “making of arrangements”, the guidance from which we can usefully apply in determining whether the current test of an expert activity for an intermediary is satisfied.

The leading VAT tribunal decisions start with Donald Ford (Financial Services) (EDN/86/110 No 2432). Ford was a pension consultant who would take down a client&#39s details and consider a suitable type of pension plan. He would then consult Mr Steel, an IFA, who would obtain quotations from selected insurance companies. Ford would then prepare a written report for the client.

He charged the client for financial advice for that report and added VAT. If a client wanted to go ahead, Ford would review the policy and might help with completion of the proposal form. He made no charge for such work but received a share of Steel&#39s commission.

Customs & Excise contended that Steel made the arrangements and Ford was providing a VATable service in exchange for his share of the commission. It was held that Ford did not simply make bare introductions of a client to Steel (which would be VATable) but was fully involved in the making of the arrangements.

Following the Ford decision, it is understood that Customs & Excise have accepted that very little is needed to constitute making arrangements. If a person is not an insurance broker, the following are each sufficient to constitute the making of arrangements (ICAEW Tax 15/94, Aug 1994).

•Agreeing with the client his financial details on which a policy will be based and passing them to a broker.

•Approaching a broker to obtain quotations and reviewing these with the client.

•Acting as an intermediary between the client and the broker by receiving and transmitting correspondence, especially the proposal form and the policy documents.

•Assisting the client in completing the proposal form and even transmitting premiums to the broker.

It should be stressed that an insurance broker or agent does not even need to show that he is making arrangements. He can rely on the sixth directive and only need show that his services are “related to” the insurance, which is a very wide expression.

In the Countrywide Insurance Marketing (LON/92/257) (No 1443) case, Countrywide, a support company, provided services to insurance brokers. It developed new insurance products and its own proposal forms and policy documentation. It negotiated a range of insurance products and premium rates for its members.

In addition to its VATable membership income, it received commission from insurance companies where members arranged policies through them. It was held that the company was an insurance agent and, although its activities did not relate to specific policies, its activities were sufficient to establish a nexus with the provision of insurance.

Based on the current understanding of “excluded activity” for an “introducer” where “taking an active part” in the financial planning process results directly in the fee/commission being paid, it would seem that it is essential that the introducer takes an active part in bringing about the product.

However, when it comes to considering introducer commission in respect of the purchase of shares, stocks, unit trusts and Oeics, the activity will be considered exempt regardless of the level of involvement undertaken. This is because of the less onerous provisions of Schedule 9, Group 5, item 5, note 5, VAT Act 1994.


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