Recent research shows that 73 per cent of advisers do not currently charge VAT on their advice fees. This is not necessarily a problem but it does suggest that all advisers need to understand which services they supply are subject to VAT and which are not.
This question has been brought into focus by the RDR and the abolition of commission in favour of fees. However, HMRC does not see RDR as fundamentally changing the VAT rules and its interpretation of what is or is not subject to VAT.
What might change as a result of the RDR is the type of services an adviser decides to offer. So when considering their business models in light of any planned changes in the run-up to the RDR implementation deadline, advisers need to be clear on which types of service will attract VAT and which will not.
Whether VAT is chargeable or not is not dependent on how the remuneration is received, that is, if it is a commission paid by the provider or a fee directly from the client but on the purpose and nature of the supply of services.
When considering whether a service is subject to VAT or not, advisers need to consider what service is being provided. The following three categories principally address the options:
1: The provision of advice is subject to VAT, so providing holistic reports or reviewing existing arrangements and funds would be a service that is subject to VAT.
2: The provision of intermediation is principally VATexempt subject to it containing three elements:bringing together two parties, one seeking a financial service with one providing financial services acting between those parties undertaking any required preparatory work.
3: Mixture of both is potentially more complex but whichever element is the predominant service will indicate whether VAT is due.
The predominant service in any supply is a question of fact and cannot be chosen so as to achieve the best result from a VAT perspective. If an adviser supplies each service independently, each will attract its own VAT status, as previously described above.
The current revenue threshold for any business over which VAT is applicable is £73,000. If you consider an adviser firm which has 400 active clients getting a service which is subject to VAT, then this threshold would be exceeded if each client’s fees (however received) exceeds £182.50 a year.
The key point is that it does not look like HMRC will be changing the VAT rules as a result of the new adviser charging regime. The VAT definitions will remain as they are now so it is up to all advisers to understand how they apply to their current service offering and any changes they are considering in preparation for the RDR.
In deciding if the services they supply are subject to VAT, it will be a decision for the individual adviser and their tax advisers and then for the local VAT inspector to agree.
Phil Carroll is financial planning manager at Skandia