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.