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VAT confusion over ongoing advice ‘grey area’

HMRC Letter 480

Advisers are still without clarity on the “grey area” of whether to charge VAT on ongoing advice services with less than three months until the RDR.

HM Revenue & Customs’ final RDR VAT guidance, published in March, set out a six stage advice process beginning at the fact-find and ending with the arrangement of a retail investment product, and where applicable, ongoing reviews.

The guidance said VAT liability of ongoing services will depend upon the services the customer has agreed the adviser should perform. The industry interpreted this as ongoing services being exempt from VAT where they were agreed at the point of sale. HMRC now says this is incorrect.

VAT guidance published by the Personal Finance Society last month includes examples that suggest rebalancing at review stage is likely to be treated as VAT-exempt. The PFS says its guidance has been approved by HMRC, which went through it “with a fine tooth comb”.

But emails sent by HMRC senior policy adviser David Coppins over the last two weeks, seen by Money Marketing, state that ongoing services are a taxable portfolio management service. Coppins says “the industry has changed its intepretation of ‘ongoing services’” since HMRC issued its March guidance.

PFS head of technical services Rebecca Prestage says: “HMRC was keen to stress if the steps are taken in the advice process, and intermediation takes place, that keeps it exempt. But firms should watch this space because there is quite a blurring of the lines between portfolio management, advice services and discretionary services. It is a grey area.”

An HMRC spokesman adds: “It is difficult to see that an adviser supplying portfolio reviews can associate this to its supply of arranging an exempt transaction in securities or insurance. The industry’s interpretation of the guidance was incorrect.”

Chartered accountancy firm Moore Stephens director of indirect tax services Mark Chesham says: “The understanding was that if ongoing services were agreed at the time of the sale, these were part of the principal supply and therefore exempt. I have been advising clients on the basis that annual reviews are built into the intial client agreement. Now all of a sudden that becomes taxable.”

Chesham warns the new interpretation could encourge “churning” as part of the ongoing advice service to make it VAT-free. Aifa senior technical analyst Linda Smith also warns of the danger of skewing client behaviour.

Ovation Finance managing director Chris Budd says: “The RDR is all about getting rid of remuneration influencing recommendation. This new guidance appears to fly in the face of the RDR.”

Investment Management Association head of tax Jorge Morley-Smith says a delayed European review of how VAT is applied to financial services has left “a shadow overhanging this whole process”. He says: “The process is taking far too long and continues to cause a great deal of uncertainty and this is an expression of that.”

The different positions on the VAT treatment of ongoing services:

“If, after the arrangement of the sale of retail investment products, the customer signs up to ongoing review services, some or all of the [six stage advice] process may occur again. The adviser should be able to determine and evidence where they are in the process with the customer. The VAT liability of ongoing services will depend upon the services the customer has agreed the adviser should perform, as outlined above.”

“Where a review takes place and the adviser carries out rebalancing the likely VAT position is that the service will be VAT-exempt.”

  • Emails from HMRC senior policy adviser David Coppins, September 2012:

“HMRC considers that if a customer ‘signs up’ to an ‘ongoing service’, e.g. reviewing, overseeing, monitoring the customer’s portfolio, that this service is a taxable portfolio management service.”

Other related developments:

  • The European Court of Justice ruled in July that the entire discretionary fund management service is VAT-able in a case relating to Deutsche Bank brought by a German court. HMRC is to issue further guidance on VAT treatment of DFMs services following the judgment and consultation with industry stakeholders closes on 31 October.

  • Bloomsbury Wealth Management won an appeal at a UK tax tribunal in July to have almost £260,000 in VAT repaid, after successfully arguing advice was ancillary to introducing clients to fund managers.


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There are 22 comments at the moment, we would love to hear your opinion too.

  1. Don’t you love when a plan comes together????

  2. Darren Broomfield 11th October 2012 at 8:58 am

    Wouldn’t it be great if HMRC came out with clear guidance; and I mean clear !

    We are all ‘dealing with’ TCF, RDR, the markets….etc…etc. Adding a further 20% to the cost of (any) advise / service is just a further shove in the wrong direction to engage the masses to save. Do readers agree ????

  3. I would also like clarity over the situation where automatic regular portfolio rebalancing has been arranged. This feature should be in the client’s interest, and should prevent the need for a fund switch at the time of the review with the client – but because no fund switch is required to be made, the adviser’s fee would be subject to VAT. If the feature is not being used however, a fund switch would need to be arranged by the adviser, making the fee VAT exempt.

  4. between the Inland Revenue and the FSA my drinking is on the increase !!

  5. @Darren Broomfield 8:58 am

    Yes Darren; all sensible people would agree with you that adding, yet further, costs to the public is totally counter to what the FSA say they are going to achieve with the RDR. We can wait, with bated breath, for the pro RDR advisers to answer you with good reasons for introducing VAT into the equasion.

  6. To MM and all other journalists who blog for them. It is now your turn to write articles that really show the RDR in its TRUE LIGHT. The amount of consumer detriment that is going to be incurred defies all belief. Get out there, write the truth the whole truth and nothing bt the truth. Let the publice finally understand just what is coming from 1st January 2013. Dont pussy foot around the issues. Write the facts and list all the unintended consequences and how they are goingto be of detriment to consumers throughoutthe whole country. Then add it the positives. They will have a clearer view of what the advice is costing and the adviser will be qualified to the required standard. For this priviledge the consumers will have paid billions of pounds and hundreds of millions in product charges per annum to maintain it. All in the name of trying to inspire confidence in the profession. To boot, the three main architects of this monstrosity have all jumped ship before the you know what hits the fan. Go on for once do the right thing and get the FACTS out in the public domain.

  7. Pathetic!!! Just over 2 months to go and no f****r really knows what they’re doing. The whole thing should be delayed until all uncertain points have been fully ironed out.
    This whole debacle falls firmly at the feet of the FSA. Their concept/experiment is totally flawed and they should be ashamed.

  8. VAT is a self assessment tax; it is the taxpayer’s responsibility to assess their own liability for VAT.

    Re-balancing was and always has been exempt.

    RDR does not impact on VAT one iota – The FSA talking/ listening to anyone let alone HMRC – come on…

    If there is an intention to intermediate the service is exempt – the well established principle of proportionality still applies. The only slightly grey area post PFS guidance now is what constitutes an intention to intermediate. So just make sure your files tell a strong story.

    While pure advice has always been potentially VAT able turnover has to exceed the £77k threshold before the tax is payable in any event.

    Lastly please remember the easy answer to a clamor for clarity is NO. The more clarification the industry demands the more likely we are to get hit.

  9. Personally, I blame the old Customs & Excise who misapplied the law, thus granting a VAT dispensation where services were covered by commission received.

    The law is quite straightforward – intermediary services are exempt from VAT, which includes preparatory advice. It is only as a result of the prevailing dispensation that commission has been treated differently from fees.

    Hence, we now have a scenario where people are bending over backwards to avoid VAT being chargeable, which is adding to the opacity and undermining the FSA’s RDR objectives.

    Perhaps it is now time to accept that we have benefited from a misapplication of the law and, with the requirement for fees, we should charge VAT for advice in the same way as accountants o solicitors.

    As someone who has worked in professional practice for many years, I would comment that I have never had a fee proposal rejected on the basis that VAT would be added to the bill.

    My view is that it is now time to accept that VAT is a necessary reflection of providing genuine advice, rather than merely arranging products, and to use this opportunity to embrace transparency of charging and emphasis on value rather than price.

  10. Anonymous
    I like to think I know this subject well and am not aware of any specific commission dispensation. It is my understanding that this is an urban myth.

    The reason commission is exempt is that it is a payment that clearly comes as a result of insurance intermediation which under Eu directive is automatically exempt. Not because the payment is commission – it is a subtle but vital distinction.

    Thus fees for the same services are also exempt.

  11. Intermediation is VAT exempt. Commission payments are paid by insurance companies.It would have been interesting to see how the VAT man could argue that a payment made by an insurance company to an intermediary could be for anything other than intermediation.

    Of course, as part of the comprehensive,thorough, and robust analysis that the FSA undertook into its analysis of the implications and consequences of Adviser Charging, the FSA fully evaluated the VAT outcomes for customers and intermediaries. So, where is it?

  12. @Simon

    As a former tax partner of a large accountancy practice, I can assure you that the former commission dispensation is not an urban myth. Indeed, I often referred to the C & E SOP, when acting as an expert witness in VAT disputes.

    Indeed, HMRC retained the SOP when it absorbed C & E.

    The rationale predates EU directives and stems for a misunderstanding of the statute – which makes quite clear that it is the nature of the service, rather than the remuneration, which indicates the VAT treatment of the taxable supply.

    I hope that this clarifies matters.

  13. Just to add to my comments in the article.

    Firstly, Simon is correct in what he says about exemption intermediation and taxable advice. The issue that I have is that until recently the understanding was that where an initial contract was agreed with a client that included (exempt) intermediation and (taxable) advice, that constituted a single supply where the VAT treatment followed the liability of the principal element (which was accepted to be the intermediation of the financial product – i.e. the reason the customer approached the adviser in the first place). So, in effect, it was nothing to do with whether intermediation is exempt or advice taxable (that’s accepted) but more that there was a single supply where the exempt element predominated.

    I also think this is implied by HMRC’s guidance that only talks about ongoing review services agreed ‘after the arrangement of the sale of retail investment products’ needing to apply the six stage process: it does not refer to services agreed at the time of the arrangement.

  14. @Monsieur Reynard

    As just mentioned, the relevant statute states that it is the nature of the service rather than the remuneration that confirms the taxable nature of the supply.

    In fact, you could have a scenario where commission is received without intermediation occuring – consider the transfer of a servicing agency to a new firm, who then become entitled to trail commission for a product that they did not arrange.

    Finally, it will not surprise you to know that, when the FSA published CP 121, it displayed a total lack of understanding of the relevant tax treatment.

  15. Anonymous @ 11.04 am

    To my knowledge there has never been an attempt to claim VAT on trail commission acquired (redirected) by the purchase of an intermediary’s client bank.

    However, in these instances the selling intermediary is surely selling their right to receive (redirect) commission payments initially generated for performing intermediation in the first place?

  16. The joys of anonymous posting…

    @10.58 Commission is exempt
    @11.04 It is the nature of the service

    I am assuming that you are 2 different people…

    @ 10.58 I would be very interested to see a link to the C&E SOP referred to as I could not find it.

  17. @ Simon Webster

    For clarity, I am the author of both posts.

    I find it rather surprising that you quote “@10.58 Commission is exempt”, when a cursory read of that post would confirm that it does not say that!

    Perhaps, it would be better for your credibility if you started to post anonymously.

    As for the C & E SOP, it would be well known to any competent VAT practitioner.

  18. @Anonymous
    Getting myself confused…
    @ 9.58 you state “It is only as a result of the prevailing dispensation that commission has been treated differently from fees”.

    But everywhere else you state it is the nature of the service. I agree that this is the case. But I do not understand where commission comes in. If it is not and never has been the nature of the remuneration (my understanding) and it is truly the nature of the service – what has a commission dispensation got to do with anything?

  19. @ Simon Webster

    Sorry to hear that you are getting yourself confused. I will try to ensure that you are, at least, better informed.

    Legislation has always stated that it is the nature of the service that indicates whether VAT is chargeable. So, as commission is, generally, paid as a result of a product arrangement (intermediation) that would benefit from the FS exemption, it was widely considered that commission was ‘exempt’.

    However, this (and the C & E/HMRC position) was based on misunderstanding that commission in itself was exempt, which it is not. Indeed, if it wasn’t for the dispensation, advisers could be liable for VAT on trail commission, where they have taken over servicing rights (but did not arrange the product) and have not, therefore, provided intermediation.

    Therefore, it is pertinent for engagements to be based around the contracted nature of the service, rather than for tortuous arrangements that seek to gain a VAT advantage.

    Subject to any over-riding legislation, a return to the original intentions of the Act would be preferable, if transparency and equality with other professions is the aim.

  20. @anonymous 12.31

    Could you post the link to the document detailing the dispensation for commission.

    I paid KPMG a sizeable sum recently for VAT advice and they didn’t mention it?

    One assumes that this is freely available and we don’t have to be freemasons to avail of the protection it offers?

  21. I thought I knew some of this but some straight answers to simple questions are needed to clarify this. Glad to see theres a VAT expert on this one so here goes.
    The easy stuff (I hope!) is:
    • if intermediation is intended and takes place its VAT exempt
    • if there was no intermediation intended then its VAT able.
    So far so good.
    However, if there IS an intention to intermediate, do advice fees now become VATable if no intermediation subsequently takes place? If yes, then how long a gap does there have to be before intermediation is deemed NOT to have taken place, or does it have to take place before the fee is charged or paid? And as has been suggested if the client effects and cancels a product then presumably it’s still VAT exempt? (presumably the FSA would understand the need to save the client money but would HMRC?!?)
    If an ongoing fee is included and contracted for in an intermediated product initially, will that ongoing fee still be VAT exempt, regardless of what services are carried out?
    If not, what are the services that can LOSE the VAT exempt status, (because surely it will make sense to contract for those separately to protect the VAT exempt ongoing fee?)
    Finally, what is the impact on existing trail? Presumably any interpretation going forwards will be applied by HMRC to everything, new or existing? Does this mean that trail that is no longer exempt will be deemed to include VAT which we will need to report and pay to HMRC?

  22. During one cold bleak winter, a little sparrow in search of a tiny morsel found its little could hardly move against the cold wind. Finally its cold and exhaustion proved too much and its tiny body began to plummet from the air towards a field below.

    Right at the moment before hitting the ground, an old bull answering the call of nature covered the bird in a soft cushion of muck. The warmth that ensued through the little bird’s body gave it a new lease of life and it flapped around in the newly formed pat singing merrily. At that same moment, the farmer’s cat happened to be taking a short cut across the field. Alerted by the chirping she took off immediately towards the source, there ending out little sad saga.

    The moral of this story is. Those that s— on you are not necessarily your enemies. Those that get you out of the s— are not necessarily your friends and, if you are in the s— and happy. Keep your bloody mouth shut.

    If HMRC clarify anything, does anyone seriously think in the long run they will seek to make a favourable move?

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