IFAs could be in for an expensive shock if a new measure is brought in to force networks to pay VAT on the fees charged to members.
HM Customs and Excise has told one network that, following an investigation by its policy unit, the network will have to start paying VAT on the charges that it levies members as a percentage of their commission.
Customs and Excise says its view is that the relationship between the client and adviser is exclusive and the contract between the network and adviser is a separate service and therefore subject to VAT.
A letter seen by Money Marketing sent to the network by Customs and Excise informs directors that it believes appointed representatives are acting on behalf of their clients and not as sub-contractors of the network, so the element of commission it retains should be liable to VAT.
The ruling could have dire implications for the network as it could have to pay an extra £100 per month per adviser in VAT, totalling more than £240,000 a year.
The network's directors say it operates its charges in much the same way as many IFA networks and is wondering why it has been singled out.
Customs and Excise spokeswoman Florence Palmer confirms that a ruling has been sent to a small independent adviser network based on a particular set of circumstances.
She says: “We have not yet had any response from that network, either on the specific rulings or in response to our question of why they have historically treated these supplies as exempt from VAT as we are not aware of previous policy rulings.”
Following high-level discussions with Customs and Excise officials, bigger networks such as Sesame and Tenet believe they will not be subject to any change.
These networks are confident that they will not be forced into a position where their services are subject to tax because they say commission has always been not liable to VAT and their charges are paid as a slice of this commission.
But Customs and Excise says if it becomes clear that this decision against one network has wider applications, it will disseminate it to the relevant bodies with guidance on how it should be implemented.
FSA spokeswoman Louise Buckley says the regulator has been made aware of the potential problem and is looking into it but will welcome discussion with trade bodies.
Finance directors believe that, ultimately, the contracts agreed between networks and their members will determine whether VAT is the responsibility of the network organisation itself or its members.
Syndaxi Financial Planning director Robert Reid thinks the whole area of taxation of advisory businesses needs “a good spring clean”. He says that a firm's liability could be determined by a clause often used in network agreements stating: “VAT, if applicable, shall be payable on any supply made under this agreement by the recipient of such supply.”
Reid says: “What it all comes down to is widespread misunderstanding. If this is an issue, I do not understand why it has not been picked up before. The big question will be if it this is a backdated tax, are there going to be any penalties?” A senior source at a financial services consultancy confirms that he has been working on the possibility of VAT being applied to network charges on behalf of several clients.
He says: “We are looking at specific cases but this could be a major issue. Customs are taking the point that there is a VAT liability arising from network fees. They could potentially enforce this across the sector but we need to get a definitive ruling to decide on the wider impact.”
It is unclear what position support services providers will find themselves in if Customs and Excise toughens up on advisory businesses.
Bankhall operates as a support services provider and runs a small network but it maintains that, according to information it has received from Customs and Excise, it will not pay VAT on its services.
A clarification of VAT treatment of services for financial advisers sent to Bankhall by Customs and Excise in February 2003 states that the provision of intermediary services for arranging most financial and insurance products is VAT-exempt but does not go on to explain network charges.
Simply Biz chairman Ken Davy says the company's position in terms of tax was made “crystal clear” when the business was set up more than 18 months ago. It consulted with Customs and Excise and was told that its services would be liable to VAT from the start.
Davy says: “I am not at all surprised that Customs have taken this stance. Our advice was clear – that services provided to financial advisers were VATable – so they were charged from the outset. To me, it is inconceivable that a service provider should not pay VAT.”
Although Davy concedes that the circumstances for networks could be slightly different, he believes that VAT has been a cloudy area for too long and thinks a closer look from Customs and Excise is long overdue.
Davy says Customs and Excise is seeking to tighten up the rules in several areas and thinks it is inevitable that networks will have to start paying VAT for anything deemed a service.
If applied retrospectively, the ruling could have catastrophic implications for an industry already suffering from increasing costs for professional indemnity insurance and regulation. Penalties applied for tax avoidance, in addition to backdating, could see costs escalate into millions of pounds for individual businesses.
There is criticism in the industry of businesses which are unaware of their tax obligations but most feel that it would be unfair to penalise them too heavily over this particular issue.
Palmer says Customs and Excise would not normally seek to apply tax retrospectively where there is any question of misdirection but says it would look at individual taxpayers' circumstances.