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VAT guidance contradicts RDR aim for advice

Financial advice will be cheaper if clients pay for it up-front rather than over the life of the product because they will not have to pay VAT, according to Skandia.

Last week HMRC and the Association of British Insurers issued new guidance reiterating that VAT is only payable on advice, not on product sales. If the customer wants advice and buys a product, IFAs will have to establish which was the predominant service.

Skandia head of proposition marketing Colin Jelley (pictured) says the guidance contradicts a key outcome of the RDR, which is to separate financial advice from product sales.

He says: “The guidance note clearly explains that any such separation of advisory services will render those services subject to VAT.

“A situation where advice fees are only exempt from VAT if they are all paid up-front when a product is purchased flies in the face of how people want to pay for advice.”

But Syndaxi Chartered Financial Planners managing director Robert Reid says: “Up-front payments will only be exempt from VAT if the main service is the sale of a product.

“IFAs may struggle to evidence that advice makes up only a small proportion of the total service given.”

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Comments

There are 32 comments at the moment, we would love to hear your opinion too.

  1. Having argued that what we do is “advice” it is difficult to see how we can now argue that the implementation of a product is the primary service and thus exempt from VAT. As all IFAs know the hard part is the advice part of the service selecting an appropriate product is the least dominant part of that service.

    Both Colin and Robert make interesting points. And of course it is now clear that had commission continued to be available as the method of remuneration this would also have been subject to VAT where the predominant part of the service was advice.

    This may therefore result in a switch away from independent advice to independent selling of products. perhaps that was the intention all along?

  2. Stephen Rowland 11th August 2010 at 9:51 am

    This is just a Tax Revenue means for HM Rev & Customs as they are skint & having all Financial Adviser’s (what’s left of themafter RDR) pay Income Tax with additional stream of VAT must be utopia to them!

    ‘S*** in one’s own nest’ comes to mind, & the ‘fee brigade’ will rue the day they get rid of commission with higher overheads compliance / taxation & less income from clients who will baulk at the fees including VAT!

  3. When Mr Johnson from the Tory’ office last week criticised IFA’s he made reference to most IFA’s becoming distributors post RDR

    I presume this would mean as an IPD (independent product distributor) no VAT would be payable by the client or the adviser, oops sorry he/she will be called an insurance salesman – perish the thought!

    We may get transparency of advice by default,
    not because of some quango but because of HMRC.

    Lee Birkett
    CEO
    TrumpoMatrix.com

  4. My own guess re the long term is that one day Independent will only mean advice with the adviser having no association with product at all.

    The adviser will simply give a piece of advice and be paid a fee directly by the client plus vat. The client will then wander off and either take the advice and buy something or will not.

    At the same time the other 95% of current advisers will continue to sell product for a fee or commission.

    The investor will then have 3 choices – 1) take advice and pay a fee 2) Buy from a salesperson or 3) Buy direct with no salesperson of adviser involved.

  5. What a total nonsense of a mess.

  6. There was nothing new in the HMRC VAT guidance. Unfortunately our society is bedevilled by perverse incentives in the tax and benefits system, this is just one of many which maybe a new govermment might be incentivised to tackle – it would be a very welcome change!

  7. Surely any sale of any product represents advice as it needs to be appropriate to the clients individual needs. Or is this a method of letting the banks take over completely, selling high charging inappropriate products on the basis of giving the client an informed choice and relying on caveat emptor. In my opinion, any selling is advice, however it is dressed up. The whole point of RDR is to provide a level playing field and provide transparency and clarity – this ruling flies in the face of that. Funny how government departments don’t talk to each other theses days before issuing rules…..

  8. It is interesting to see ABI/HMRC attempt in 9 pages of poorly drafted text and diagrams to articulate the position of legislation that has, until now, been byzantine in construction.

    I understand already that there ia drafting error in the text whereby the payment for ongoing services does not have to be made up front but simply agreed up front. This is a pretty fundamental error and raise serious concerns over the validity of this document as anything other than an ABI lobbying document with the help of some sucker of a local inspector.

    It is a poor document that will be battered all over the market by indirect tax lawyers and accountants.

  9. I too studied the new guidance, and as Nick says the only way to save clients the cost of VAT is to show that the predominant service was the purchase of a product. This may mean an amended wording of fee agreements from ‘advice on investing xxxx’ to ‘arrangement of a suitable investment vehicle for xxxx’.

    As the client is and should always be our key priority then if a varied future wording saves them 20% VAT (from January) then surely that is working in the client’s best interests, even if this does not convey the message of ‘fees for advice, with products an anciliary part of this’ that I for one would like.

  10. I liked the point that Nick made, interesting to think about how many IFA’s actually give independent ‘advice’ currently, or how many of them are simply ‘independent’ salesmen…..

  11. My view was that RDR’s aim was to stop product providers setting commission levels and allow this now to be driven by the adviser and client, not to add VAT to all fees.

    Therfore adding VAT to fees should not be seen as meaning a more professional service and those not adding fees seen as product sellers.

    I have read the guidance and it is quite clear that if as a consequence of advice a product is bought by a client (pension, wrap platform etc.) the client does not have to pay VAT, surely a win for the client.

    As financial planners our main purpose is to ensure clients are providing for their future needs and desires whilst protecting them from dangers along the way. In the majority of these instances this means recommending a product, so in these instances no VAT is due.

    In others, say a review of existing plans, pure cash flow planning, debt reduction plans etc. no product is recommended therefore VAT is due.

    Very clear guidance in which the HMRC have actually set out clearly that VAT can be avoided, which although welcome is very unusual.

    Finally in relation to ongoing servicing of investments the guidance also states this can avoid VAT if this service is agreed as part of the original contract, surely a win win situation.

    Lets be clear in a world where most IFAs are running at profit margins of 10% they cannot afford to absorb VAT so this needs to be serioulsy considered when drafting terms of business and advice letters.

  12. Mr Old Fashioned 11th August 2010 at 10:09 am

    Regarding Nick Bamford’s comment about the independent selling of products having been the intention all along, the only thing we can be certain of is that it is HMRC’s intention to ramp up the tax take by whatever means possible. That has always been the case.

    What we cannot be sure of is what the driving force behind RDR has been. I am told that the FSA is not that proud of its creation (i.e. RDR) but that it is too proud to back-track on it now.

    Could it possibly be true that behind the scenes is a clever chap at the Treasury? And that his long-term strategic planning has stiffened the resolve of the FSA as far as RDR is concerned?

    The outcome of all this is that the VAT tax take could increase, at the expense of those clients who can afford to pay for independent financial advice: the wealthy and the upper middle class.

    Come to think of it the wealthy and the upper middle class are a minority. In a democracy it is always the minority who get oppressed, as we have seen in recent years with members of gun clubs, and smokers.

  13. The great british public might argue why any of it should be exempt from VAT? What is the wider moral justification. Why should relativley well off people who can afford financial advice dodge VAT?

  14. I disagree that advice will always be the primary or predominant part of the service offered to clients. Surely it depends on how predominance is measured. If it is time based then it can take minutes to impart the advice and hours to implement the product. Is fact finding advice? I suggest not. I think that in most cases you would be able to argue that intermediation would be the predominant part of the service where a product is actually put in place.

    The real issue here is that paying for advice is more expensive if there is no product reccomended to be implemented.

  15. I have a problem with the ABI example on IHT. Let us say the client says I want a WOL policy for inheritance tax purposes. You do as he says and that is non VATable. However, if you meet your regulatory obligations and give full advice (as per the example) it is VATable and yet the workload is not much different! The time to set up a whole of life plan is enormous – underwriting, chasing, trust set up etc. If this was not done then the intermediary product could not be “sold”. My concern is that the ABI have underestimated the effort required to carry out our regulatory obligations to deliver a “product” and cannot differentiate between that and advice.
    Why was the ABI involved – what do they know about the intermediary sector?

  16. I don’t see what the problem is.
    Post RDR the wealthy clients will pay VAT for their advisory services.A lot of them will be paying VAT already.
    On the other hand Mr & Mrs average will find that their IFA has either been pushed out of the industry or alternatively they will find they have been segmented out of any active ongoing advice.They can then go to the banks for advice which will include a product sale so VAT will not be an issue

  17. When we set up a fee-based practice in the early 1990’s, it was minutes before Customs & Excise were on our doorstep demanding to how we planned to apportion VAT to our services and how much ‘input’ we expected to claim. Having thought we had a settlement, the first inspection very soon afterwards threw up all sorts of ‘differences’ and lead to endless discussions with C & E and a large bill. The time and effort involved in presenting the figures to them was wholly unreasonable.
    Having said that there nothing new in the guidance. It is clear that many businesses have been getting away with it for too long.
    Any professional advice practice charges VAT on fees; the anomoly of exempt supply in ‘arranging a product sale’ is totally outdated.
    Get with it chaps, your leader (FSA) has once again been found wanting.

  18. What is the problem!
    The treasury is desperate for money, to pay the pensions of regulators and Civil Controllers (sorry servants)

    Which very ripe piece of fruit is past its ripe off date? Answer the financial Services Industry.

    Take the turnover of this so called professional industry and snatch 17.5%. Whoever achieves it will end up just like John Prescott.

    If you don’t like it, Go back to double glazing start a new regulater and live and screw that industry.

    Bring back Barlow Cloudes all is forgiven.

  19. It strikes me that the role of IFAs in the future will be as financial planners, selling financial plans for a fee plus VAT to the wealthier middle classes. (Hence the higher level of qualification and move towards fee based advice to align more with the professional services provided by Accountants, Solicitors etc) The implementation of those plans will be left with the client to seek out the most appropriate product provider. This could be achieved through a financial intermediary (Broker, Bank, Tied Adviser) who will hopefully match up the most appropriate product to satisfy the customer needs (whether they are independent or tied). VAT will not be payable because it is product based.
    If this is the future position, ask yourselves:
    Where will the majority of the population seek their financial advice?
    Will it cause people to save more and close the savings gap?
    Will it encourage people without sufficient protection to seek more cover?
    Will the majority of the population receive more or less good financial advice?
    I suggest it is time for action by the whole of the IFA community.

  20. Seems to me everyone forgets who the ultimate loser is here, its the client. They will have to pay more for the service we offer. Less and less people will come to us for advice, it will be left to the risch and privilaged.

    I don’t care what any adviser says, we will lose market share over the RDR issue and the losers will be the lower end clients who only get advice due to advisers cross subsidy.

    But Hey who cares about the clients, obviosuley not the FSA or the revenue.

    Maybe its time to do away with quangos and then there will be plenty of money to go about to offer free advice to the clients who can’t afford fees.

  21. The FSA is legally obliged to consider the costs of consultation papers and their effect on the industry and consumers. When the RDR was proposed, the issue of VAT had yet to be clarified. The latest clarification and discussions clearly shows that there are cost implications which were not considered by the FSA in the RDR which (legally) should have been. This material impact on cost to consumers (20%) has not been considered. Surely a basis for judicial review?
    Furthermore, when will the FSA consider the impact of VAT on the RDR as they should have done in the first place?

  22. Andrew Moore’s recounting of a practical experience really does some it up. Look at the rock and the hard place post RDR.

    If you try and avoid the VAT then perhaps expect the regulator to deal with you first and then HMRC or Customs and Excise second. If you do charge the VAT then you are fine – giving advice and acting as a tax collector for the Govt. Just keep your records straight and remember to pay all of the VAT that is due when it is due.

    RDR was hatched in the minds of the FSA under Labour. The VAT situation on fees is old stuff. I suspect joined up thinking here.

    Once again the emphasis of establishing the predominance of advice vs product sale will fall on the IFA.

    With all this in mind will we have any time to see clients???

  23. Is CAR or Adviser Charging (or whatever it is that the wretched Arthur Pewty jobsworths at the FSA want it called this year) going to be subject to VAT? I may be wrong, but I’d thought the same exemption would apply as to commission.

    That having said, the great majority of advisers are advisers on packaged products, aren’t we? Nothing to be ashamed of that, is there, provided we find for our clients the best value packaged product and provide a good standard of long term service on it? Why are so many people leaping onto their high & holy horses about it?

    Nevertheless, Nick Bamford’s philosophy that advice and the implementation (sale) of a product to meet an identified need should be treated as two separate propositions is one towards which (IMHO) we should all at least be trying to work. Otherwise, our advice will remain open to the suspicion that it’s always predicated on clinching a sale.

    The other side of that coin, as Nic Cicutti has pointed out, is that most people go to most financial advisers for a solution that involves actually “doing something”. In most peoples’ minds, that means making some sort of commitment to a product, be it a mortgage or a pension plan or a life insurance policy.

    As a result, having to fork out a fee of perhaps £500 or more (+ VAT) for advice that’s only stage one of a process that might not actually lead to a stage two is a tough one to sell.

    Some years ago I went to see a client who had what might reasonably be described as a typical IFA-arranged cautious portfolio of income producing products ~ a WP Bond with a badly dwindling reversionary bonus rate and a nasty MVR, a Distribution Bond that was down in value and so on. I charged him an unprofitably moderate fee to review it all and concluded that for now there was nothing to be done but hang with it all and review it again in a year or two’s time. He said: So what have I paid you £150 for? Go figure.

    Advice is a lot harder to sell than products, even though in a perfect world one may well lead (quite legitimately) to the other.

    But then the FSA doesn’t understand the real world, and that’s the root of a good deal of our problems.

  24. To: Sam Caunt

    Joined up thinking between the FSA, the Treasury and HMR&C? Thou jesteth, surely? Surely you’ve not forgotten what Hector Sants said on national TV about how the FSA is “entirely independent of government”. That being the case, then how can we expect any sort of joined up thinking?

    As for the FSA’s legal obligation to consider the costs of consultation papers and their effect on the industry and consumers ~ yes, indeed, it’s all set out in the Statutory Code of Practice For Regulators, as drawn up in 2007 by the Department for Business Enterprise & Regulatory Reform (now supersed by the Dept,. for BIS).

    The only trouble is ~ the FSA takes bugger all notice of any of it and nobody holds it to account.

  25. It should be worth remembering that VAT (like all taxes) are dreamed up by people who want to rip off other people – distributing other people’s money whilst taking a slice for themselves (politicians).

    VAT is applied in a completely arbitrary way – it wasn’t God or even Moses who decided what should be VAT-able and what should not.

    When a builder inspects my property because I’m thinking about an extension, he doesn’t send me an invoice (with or without VAT) for the general guidance he might proffer. He might even provide written estimates before any formal planning stage – again without an invoice but in the hope of getting the work. I am sure that there are many IFAs including myself who are prepared to visit potential new clients with a similar approach. I will also offer advice (sometimes quite specific) without the client being obligated to ‘buy’ or to pay a fee.

    As far as I am concerned, if I am forced to charge VAT on advice then I will simply distribute products – I can always explain to a client or potential client why I don’t formally give advice.

  26. I think Sam Caunt has hit the nail on the head as far as a potential 20% increase in the cost of advice to consumers and that the FSA may end up being challenged by a judicial review if they don’t go back and reassess the cost benefit analysis of needing to approach VAT differently in future.

    This is actually a bit of a bombshell for anyone who has been building up renewal or fund based to cover ongoing intermediation work…

    I was always of the opinion that the intermediation was VAT free and hence it was immaterial whether the client chose to pay us by commission or fees. It now appears if the client chooses to pay us over time for an ongoing service of intermediation (whether that be a fee by cheque, adviser charge, fund based or renewal commission for example), that intermediation will be chargeable to VAT!

    Even the most pro RDR person must now see that there are more reasons for putting back the RDR Jan 2013 deadline to allow time for the increasing number of RDR problems to be resolved rather than ploughing on regardless…

    Ironically for smaller directly regulated firms (i.e. non network members), they may be in a position to keep their turnover below the VAT threshold, so this clarification may result in more people considering going direct rather than to a network, where the VAT threshold would automatically apply as it would be across all network members!

    For once I have not read the document I am commenting on before commenting, so I may have missed the point….

  27. I just had a dreadful thought ~ if this goes on, before too long the levies extorted from us by the FSA, FOS, FSCS and the FCEB (towards which I don’t see why we should have to pay a penny) will also become subject to VAT.

    VAT registered companies will be able to claim it back, of course, but for the small non-VAT registered firms who aren’t members of a network, it’ll be yet another nail in their coffins.

    Doubtless the FSA will fully endorse such a move.

  28. As posted elsewhere, the document’s author has confirmed that the word “made” in Note D (about 5 lines up from bottom of para) should actually be “arranged”. ie in relation to payment of ongoing services.
    So effectively no change to current VAT regime, altho the “predominance” issue is about as messy and subjective as any tax liability assessment can be. IF “advice” is VATable, then the regulatory imposed change to an “advice” charge, might help HMRC win more arguments

  29. Dreadful thought Part II – the return

    If there is going to be any confusion as to whether or not VAT is to be charged then please be assured….

    VAT will become liable on all services..

    … simples…

    HMRC are like that …. logical….

    mmmm …VAT on AMC’s… well perhaps that’s a bridge too far…

  30. Actually Im not sure I agree with Nick Bamford in his first comment on this thread. Depending on where you draw the line, Im not convinced that the arranging and implementation of a “product” IS necessarily the least dominant part of what we do. You cant “arrange a product” without fact finding, discussing the clients needs and thus working out what TYPE of product you need to implement; also surely funds that are used to build a portfolio are part of the “product” so working out which funds by assessing risk and the objectives to be met is all part of arranging the product, researching them, combining them together, working out which platform, wrap or packaged product these funds are best placed within – this is all necessary in order to “arrange” a product. NO product could be arranged withouth all this having been done and it can be very time consuming. Let alone implementation itself. Also, if Im understanding the rules right, the fact that the client might pay you for all this WITHOUT then implementing the prodcut with you doesnt change the VAT exempt nature of this work, in that implementation itself is NOT the test.

  31. We – or at Least Julian Stevens – rebukes his own mocking words.

    Labour invented them, Labour appointed the management, Labour increased the Tax grab indirectly and Labour wrecked the economy – they claim independence but I suspect they have met with Ministers and Prime Ministers.

    These aren’t idiots we are dealing with it is robots or glove puppets.

    It’s joined up thing all right – a glove puppet is operated from below – a string puppet from above.

    Never underestimate the enemy.

  32. OK, I’ve now read the ABI Guidance I downloaded from your website. The first thing I’d say, is that bearing in mind Paul Harding has spoken to the ABI it would appear and confirmed there is an error in Note D, it is disappointing the document has no version number or date of production so that anyone reading it would know if it was the most up to date version! Even small firms like ours have version numbers for documents so it can clearly be identified what is current and what is not!

    Moving on, there is a big difference in the amount of time one needs to spend considering these VAT issues if you are a directly regulated firm compared to if you are a network member.

    The ABI guidance and VAT rules have not changed so this guidance may result in some realising they have not charged (and paid VAT), when they should have done and for them this could be quite worrying. It is unlikely as many directly regulated firms will have made this mistake, especially those with only one or two advisers.

    Turning to the guidance itself – It makes sense to me, but ONLY if you read both the flowcharts and frequently asked questions (FAQs) and then follow the flowchart based on the FAQs. If you don’t, the flowcharts will NOT work.

    As an example look at Flow diagram B “is the adviser charge only payable if there is a sale” and “did the customer purchase” and if it is a NO, the chart says VAT chargeable. Yet if you read FAQs, 1, 2 and 3, you need to think about how you work and how you charge. If you work on commission (not offset), you don’t get paid if nothing goes forward, hence no VAT. If you charge a fee, whether offset against commission or not and the client doesn’t go ahead, the table says, VATable, but FAQ 5 clarifies further. I think a lot comes down to thinking about being fair yourself, did the work on a product which did not proceed for whatever reason (NTU, decline, whatever) predominantly involve intermediation, if so, whether it went ahead or not, then the fee should be seen as not VATable (FAQ5)

    Flow Diagram C – Looking at ongoing trail, fund based or even a physical fee and effectively says at page 7 that if agreed at the time, point 1. it will probably be Vat exempt as the predominant work is likely to be intermediation, but if point 2. It is negotiated after; this is a separate transaction and needs to be looked at in isolation based on the stated service and the proportion of intermediation compared to advice.

    There appears a misunderstanding with note A “customer wishes to decide if they should make additional contributions VAT will be due” – Bearing in mind most policies are segmented and increments have a new policy number and suitability needs to be confirmed, then it should logically be POTENTIALLY VAT exempt until you think about what proportion is intermediation (i.e. form filling and liaison with provider) and what is advice, when you can conclude the Vat due is probably right as per note C.

    The example of a whole of life contract in note C, is just that, term assurance, IPP or any other product could have been used as an example.

    Note D, does appear wrong and it is only this bit which really needs further clarification and I would hope it is rephrased as “payment for all services must be AGREED rather than MADE…. If that becomes the case, it should be business as usual although we may reword our client agreements slightly so we can pigeon hole each fee/charge to the client as to exactly what service it refers to and it’s VAT status. As an example we advise providers of client changes of name and address (intermediation), this should form part of the trail or fund based we receive for the term of the contract and that logically is Vat exempt. The other thing there of course is what is the Vat situation if the contract is varied AFTER the product is affected or initially intermediated?

    Ultimately I feel ABI and HMRC are simply saying think about the INTENT of the action before confirming whether it is VATable or NOT and you should not go to wrong. The problem is that so much is a matter of interpretation by the local Inspector of Taxes. Don’t try and play the rules to the best of your or your clients advantage, do what you think is right and fair and stand by your principles on behalf of your client.

    Looking at the different implications for small directly regulated firms and networks –

    Directly Regulated – My firm is directly regulated and everything I say below is based on that starting point, it is very different for Network members, my starting point there would be different. My simple way of looking at things to know how much time to spend worrying about VAT is firstly to remind myself what the VAT registration threshold is i.e. 1st April 2010 £70,000, is my TOTAL turnover above the VAT threshold and the simple answer is YES. OK I need to think a littlemore. What proportion of my turnover is intermediation and what proportion is not and I’d be inclined to say about 2/3rd is intermediation, QED unless my turnover exceeds £210,000 per annum, then my non intermediation, i.e. VATABLE work is unlikely to be chargeable to VAT. Were I to take on a second adviser and our turnover double, this would be much more of an issue and I’d need to spend a lot more time working on it NOW. With RDR having implications from Jan 2013, it is likely I will have to merge with another firm or take on another adviser, in which case it makes sense to focus accounting which is already split Fact-finding, research and implantation so that the increase costs to clients necessary to meet VAT, should we expand can be considered and planned for, including preparing clients for this. It also then has implications upon when to replace capital items where VAT may be reclaimable if VAT registered, whereas at present we can’t.

    Network Member – I’m not one, but if you were to follow my rough rule of thumb above, then if you have paid no VAT at all and some of your income derived from non intermediated work, whether that is fees charged for IHT work or anything no product related, you’ve probably underpaid VAT for years.

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