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VATs life

The last Budget increased the VAT threshold to £54,000.

1: When does an IFA have to register? Is it when they reach this level of

non-exempt turnover or when they pass a lower figure?

A person must register for VAT when his “taxable” turnover is greater than

£54,000 in any 12-month period. Taxable turnover is defined as

turnover which is liable to VAT (either at the standard or the zero rate)

and does not include any exempt income.

Therefore, if an IFA has income of £53,000 which relates to taxable

activities and £150,000 relating to exempt supplies, registration is

not required. The level of turnover is determined on a 12-month rolling


Registration is not necessarily a bad thing. It requires that VAT is

accounted for on taxable supplies. However, it does allow at least a

proportion of the VAT incurred on costs to be recovered by the IFA.

Dependent on the level of costs incurred by the IFA, this may prove


2: An IFA produces a financial report based on the information given by a

client but no investment/insurance contracts are arranged. Is VAT applied

to the fee charged for the meeting and report?

The VAT Act 1994 exempts both the services of an “insurance intermediary”

and the provision of “intermediary services” in exempt financial

transactions. The service of introducing clients who want to buy or sell

investments/insurance to vendors/purchasers of such products is exempt from

VAT even if the intended transaction falls through. If, however, no

contract is envisaged when the report is provided, VAT will be due on the

fee charged (subject to the IFA being registered).

3: An IFA advises a client and subsequently arranges investment/insurance

contracts based on recommendations made. Remuneration is by fees only and

the invoice itemises the charges for the meeting, report and contract

arrangement. Is VAT applied to the whole amount? In the same scenario, the

client is invoiced for the same amount described only as contract

arrangement. Is VAT applied?

Each different part of a transaction may carry a differing VAT treatment.

Where the engagement letter (if any) and the invoice split the service into

its constituent parts, each part should be analysed to ascertain the

correct VAT treatment. In the above situation, any services provided before

the client has decided to invest/insure are liable to be taxable. Those

provided after a decision has been made may be exempt. Where no split is

made, the VAT liability is likely to follow that of the most prominent

part. If the dominant feature is of “contract arrangement”, no VAT is

liable to be applied.

4: An IFA advises a client and subsequently arranges investment/insurance

contracts based on recommendations made. Remuneration is part commission

and part fee. Is VAT applied to the whole amount received by the IFA

(commission plus fee), the fee element only or not at all?

The VAT liability of a supply does not rely on the source of payment but

on the service provided. The distinction between commission and fee income

is irrelevant. The allocation outlined in the answer to question three must

be applied.

5: A client approaches an IFA with full details of the

investment/insurance contract that he intends to enter into. The IFA

arranges the contract but no advice is given. Should VAT be applied to the

fee charged for arranging the contract? No – the IFA is acting as

introducer. As such, the fee is exempt.

6: A client is introduced to an IFA by a third party and the IFA pays a

fee for the introduction. Should VAT be applied to the fee paid to the


The exemption from VAT covers the introduction of seekers of

investment/insurance services to those providing the service. The

introduction of such seekers to another introducer is not covered and VAT

should be charged (provided the introducer is VAT-registered).

7: A client is introduced to an IFA by a third party which is involved in

some information gathering and attends meetings with the client and IFA at

which it is established which is the most suitable contract for the

investor. The IFA arranges the contract and pays a fee for the

introduction. Should VAT be applied to the fee paid to the introducer?

In this scenario, it appears the third party is also providing an

intermediary service within the definition of theVAT Act and his fee should

be exempt.

8: If a specialist company, instructed by an IFA, provides a tax

calculation which leads to the IFA arranging a contract for the client

based on the information, does the fee paid to the tax specialist attract

VAT? Yes.

If an IFA is usually remunerated by commission but occasionally charges

fees, the fee income in any one year can be very limited. If the income to

which VAT is applicable remains below the threshold should the IFA add VAT

to invoices where applicable?

9: VAT should only be charged where the service supplier is

VAT-registered. As described earlier, registration is only required where

the supplier&#39s taxable supplies exceed the VAT registration threshold.

Voluntary registration is allowed when taxable income is below the

compulsory threshold.

Once a supplier is regist-ered, VAT must be applied to all taxable supplies.


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