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VAT out of hell

As top Government members continue to chew over the Labour leadership in various restaurants, the FSA, the Treasury and HM Customs and Excise are preparing for a summit meeting on VAT for intermediaries.

Officials from these three bodies are unlikely to be dining on oysters at Loch Fyne but the implications of their discussions will be far more significant for the financial services sector than Labour Party in-fighting.

Moves by Customs and Excise could see IFA networks and the expanding mortgage and general insurance networks and even direct operations facing increased VAT liabilities. It remains to be seen whether support services companies will be affected.

Money Marketing has learned that the ruling forcing one network to pay VAT on its member charges is to be applied nationally as part of a crackdown by Customs on the way that networks operate.

One of the networks contacted by Customs has been assured that no ruling will be applied to it individually which will not be applied to the trade nationally and as far as possible contemporaneously.

Aifa director of policy and technical services Fay Goddard says the association is focusing its energy on the potential problem of VAT. She says: “Customs has broken up a business model piecemeal.”

Goddard fears a domino effect. She says costs between VAT-registered firms trading with each other could escalate and that the cost of implementation for the whole financial services sector could be very high.

She says: “We flagged this to the FSA as soon as we became aware of the first ruling. We will have to wait for the final decision but firms will need to look at the contractual relationship between the network and the adviser. Contracts for the self-employed advisers may be different.”

Goddard says Customs will have to decide whether they want to apply VAT to the intermediary or parent company.

But Ernst & Young head of indirect taxes for financial services David Bearman offers some hope for companies which are awaiting a letter from Customs, saying he is confident that the Customs ruling against one of his clients is incorrect.

He says: “I think there are a couple of important points to be made here. Customs is entering into dialogue and this is clearly not a closed issue. The answer could be down to the contract with an IFA, network and the individual. From the information I have looked at, we are confident that the ruling in my client&#39s case is incorrect.”

Bearman believes it may be impossible for Customs to bring in this ruling across the board as contracts vary significantly from firm to firm.

He says: “I think it is fair to say that Customs is looking at this on a business by business basis. The circumstances are different and driven by each contract, which may be different.”

Deloitte & Touche indirect tax director Robin Hume advises IFA networks to look very closely at the contracts they have with their members. Based in Scotland, Hume says he has had discussions with two network clients with VAT problems and has heard of at least one other case in the London region.

He says: “Clearly, Customs is looking at this sector and network operations very closely, particularly the VAT liability of various sources of income. The cautionary note has to be that all operations need to be looking at this, not just networks.”

Although the ruling looks set to apply to IFA, mortgage and general insurance networks, it is unclear whether support services providers will be caught, with some tax experts saying they are too distant from the exempt product to escape taxation.

Hume says: “All firms should look very carefully at their contracts and seek professional advice and not just roll over and take a Customs ruling.”

He thinks some firms will fall foul of the standard ruling but believes the main problems will occur when firms go back to their contracts. He says the majority are silent on VAT and could see the networks themselves rather than members landed with the bill.

He says: “It is possible that a revised contractual position could be achieved which would allow for VAT exemption for the income of both the network and the AR. However, this would have to be very carefully considered to ensure that the parties were sharing in the risks attaching to the financial advice given and the amended arrangements were clearly commercial and not merely tax-driven,” Many of the bigger networks have the most to lose from any form of retrospective action from Customs. Based on an extra charge of £100 per RI a month, a network with 6,000 RIs could face costs of £7.2m, with the bill tripling to more than £21m if the move is back-dated three years.

VAT treatment will be determined by the nature of the supply of goods. The new ruling means that the payment taken by the network or parent company for the services it provides will be VATable and will not be treated as part of commission.

This treatment could affect not only networks but the few remaining product providers which have a tied salesforce such as Legal & General, St James&#39s Place and the Zurich Advice Network. St James&#39s Place said it was not in a position to comment and L&G said its finance team would be looking at the situation.

Burns Anderson chief executive Ian Parsons says his network has not yet received a letter but he is consulting with experts to look at any potential problems which the firm may encounter.

He says: “It is an extremely important issue that could have far-reaching consequences not only in the financial services industry.”

Parsons believes Customs has changed its stance significantly and has appointed a member of his finance team to concentrate specifically on the network&#39s position.

Although he says the business is looking at how it can adapt, he does not want to see a review of taxation for IFA businesses, the solution proposed by some in the sector.

He believes this would cause unnecessary upheaval and add significantly to the burden of firms already trying to absorb the impact of FSA regulation and PI costs.


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