So, after a couple of weeks of “VAT and financial services – the story so far”, it is time to look ahead to “VAT and financial services – the story as it could be, post-whatever the outcome of CP121 may be”.
Of course, fees and commission have been two key issues in the consultation process. As proposed in CP121, remuneration by fees (or being remunerated through a defined payment agreement, to be precise) is central to the definition of an independent financial adviser.
The appropriateness of this has, of course, been called into question by the many representations and responses to CP121 that have been made so far. There is also the small matter of the investment services directives, which appear to call into question the need for the receipt of fees being critical to the definition of an independent financial adviser – the receipt of commission, it would seem, should not operate to deny an individual the right to designate himself or herself as an independent financial adviser.
Be all that as it may, there are and will continue to be those clients who prefer to pay fees for advice (the corollary of which should be lower-charged products) rather than have their adviser receive and retain commission from product providers.
Perhaps as many (if not more) already base their business relationship on an agreement with their adviser that is on the same basis as that envisaged under the defined payment arrangement described in CP121.
Typically, the client will agree with the adviser the fees payable but will also agree that, to the extent that commission is generated from any product sale, the adviser will retain this and set it against the fee due. Further, to the extent that the commission payable will exceed the fee due, the adviser will agree with the product provider that commission taken will not exceed a specified amount which will, in effect, mean that the excess potential commission will remain in the product and work for the benefit of the client.
It would seem that there will be little, if anything, to prevent this type of agreement being a defined payment arrangement under CP121.
Whatever then emerges from the CP121 process, this type of arrangement is likely to continue. So what are the VAT implications?
We can seek useful guidance (comfort, even) from TR787 issued by the Institute of Chartered Accountants in England and Wales in 1990. This release contained some useful guidance on introducer arrangements – which I looked at last week – but it also covered the position when an adviser reduces the fee due from a client by commission received from a third party. In TR787, attention is drawn to paragraph six of VAT Notes No 1988/89. TR787 is reproduced (right).
Since the publication of
TR787, the rate of VAT has increased to 17.5 per cent.
We are, of course, aware that in the context of CP121, understandably, Customs and Excise has been reluctant to confirm that this practice will also hold good for the prospective defined payment system. After all, it may not even come to pass.
It is, however, reassuring that common sense seems to prevail under arrangements entered into for rebating commission against fees.
Method of accounting for VAT on fees
Many traders, when charging fees to their clients, reduce the amount by taking into account commission they receive from third parties. For example, a financial adviser provides guidance on insurance to a client; the insurance company pays the adviser a commission and the adviser passes on the benefit to the client by charging a lower fee. In the past, traders have accounted for output tax on the full value of their supply before any deductions for commission. Customs and Excise has reviewed this ruling and from now on you need only account for output tax on the fee shown on the invoice.