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VAT analysis

The letter in the October 21 issue on the supposed advantages of fees over commission demonstrates once again that the advisory community even now lacks a proper understanding of when VAT should be charged for services supplied.

Phil Shaw incorrectly states that VAT would be applicable on his initial fee if it was paid direct, as opposed to going in and out of a pension product and somehow mysteriously becoming VAT-free.

If VAT is due on his fee, then it is also due on his CAR-style commission paid from the provider. In fact, as what he is doing is intermediation, the service provided is clearly exempt.

His review fee may also be VAT-exempt but that depends on how much of what he does at the review involves intermediation and how much other services. If the majority of the review work is intermediation, the fee will also be VAT-exempt.

Once again, if VAT is due then it is also due on the CAR commission – the method of payment is irrelevant. All the above assumes he is doing enough non-exempt work to be required to register for VAT in the first place.

Paying fees through pension products is clearly something the FSA expects to happen and it has commented it has cleared this approach with HMRC in past consultation documents. So the approach of funding the advice cost with extra contributions (on which tax relief is allowed) seems perfectly legitimate.

The very good point Phil makes is that if you ask someone if they would rather pay a fee or commission, the answer will mainly depend on the relative magnitude of each.

If I quote someone a fully time-costed £600 as a fee for a piece of new advice work and my comp-etitor wants to take 3 per cent commission on a sum of £100,000 to be invested, I get the business every time. If the invested sum to be is £10,000, it is not going to be my client.

Mark Potter
Ethos Financial Management

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