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What advisers are saying: Tax and adviser charging

Phil Wickenden Technical Area 200

Only 39 per cent of advisers feel that the tax implications of facilitating adviser charges through products have been explained adequately. And over half of those advisers feel, to a degree, let down, either by the regulator or by product providers, with what they perceive as a distinct lack of detail and a failure to dialogue appropriately.

There has also been a bit of commotion caused by conflicting provider interpretations of the implications. No surprises there.

Confusion rules for many advisers at this time and it is clear that further guidance and clarity on the issue is needed and would be welcomed by advisers. So, yet more uncertainty to pour over a bowlful of ambiguity. Nice. In the meantime there are huge suitability implications rumbling below the surface as the method of payment for advice potentially impacts the client from the point of view of tax optimisation. As such, part of the advice proposition must necessarily include clear direction regarding the most suitable means of paying for it, taking into account the individual client’s circumstances.

Good advice is more than giving the client what they want. I’ll be looking at this in more detail next week but first wanted to address the collective holding of breath while a good portion of the industry waits to see the lie of the land. But can we afford to pause?

Contrary to popular opinion, good decision making is not about turning uncertainty into certainty. There’s little advantage to be gained from waiting until the dust settles and for the vista to become clear. Because it seldom does before fresh activity kicks up more dust.

We need to be comfortable living with the discomfort of imperfect vision. The reality is that strategy is about making choices in an environment of uncertainty. No choice made today can make future uncertainty go away. Those that thought that things would become calmer once they got over the line on January 1st could be in for a few surprises. As the Harvard Business Review points out: “The best that great strategy can do is shorten the odds of success”. None of these bets can be guaranteed.

Strategy and decision making means making the best possible choices you can make today and then being responsive when the bets do or do not come in as hoped. In essence, it’s about saying “this is what I think will happen” (based on the information available and your own good judgement), watching what does happen, and then updating the strategy based on the newest information.

Phil Wickenden is managing director of So Here’s The Plan

Phil Wickenden April 4 2013

All quotes have been taken from interviews with qualified financial advisers


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Am I missing something here?

    There is no VAT issue – where intermediation is involved/ attempted advice and any execution is VAT exempt – end of.

    What is intermediation? Anything that involves trying to set up a product which includes advice on fund switching and portfolio re-balancing.

    Pure advice is potentially VATable but advisers still need to hit c £70k before they need to register for VAT and charge it; so this is surely a non issue for most small firms and larger ones have internal/ bought in expertise.

    Doubtless someone will pitch in and say I am talking rubbish but VAT is a self assessment tax so if in doubt talk to your local inspector.

  2. @Simon I really must come along to one of uour local PFS meetings one day, but they don’t let me out of my dungeon basement in Thanet much.
    anyway, much as I agree with you on the VAT issue, hence why I don’t charge it (yet). The FSAs recent hatchet job with HMRC on platform rebates (which i don’t really care about as most of my clients are either using passives or moving to clean share classes now), my worry is this attack by HMRC instigated by our friends at Canary Towers may yet result in the argument that advice and intermediation by an advisery firm cannot be dedcuted from a pension pot without being treated as an unauthorised payment…..
    This is why the HMRC and FSA need challenging on the platfrorm and wrap debacle despite the fact I prefer the idea of clean share classes.

  3. Simon I agree, I do not understand what the problem is, VAT as you say is a simple issue, if advisers do not understand that then maybe they should consider their position.
    Fees are fees, I may be wrong but is this about advisers still wanting “commission” but in a different format, if the client cannot afford to pay for the advice then don’t give them any.
    OK that sounds callous but where is the problem, if a client has £50,000 to invest the they must also have a reserve fund – from which a fee can be taken
    If its a regular premium then the client must still have a reserve fund, or take it in stages (OK some issues if more than 4) but what about retainers?
    If its a pension for a Self Employed or Director, advise and charge the business, that’s probably where the money will be coming from and the fee is tax deductible.
    Since January, I have just told the client, these are the rules, this is the way any charge will be made, by discussing options on how a FEE may/will be paid, I send a Letter of Engagement and when its signed I start work. To quote a well known furry animal Simples!!

  4. I am not sure that it is VAT that he is referring to here rather income tax implications.

    In the past if an adviser was paid annual commission from an investment bond there were no issues.

    If an adviser going forward takes an annual adviser fee from an investment bond this reduces the amount of the 5% tax deferred allowance available to clients for withdrawals as the payment is classed as a withdrawal by the client – another unintended or intended consquence of RDR.

  5. Well, I don’t think the tax issues are clear! Let me give you one scenario: client has £200k invested with us and we take 0.5% from this investment (on a monthly basis). We use this to reduce or eliminate our annual Service Fee.
    At the end of the year, we invoice the client for say £1,000 as our service fee and note that this has already been paid. Not all the £1,000 has been in support of advice on the investment and let us say that service fee is £800 for general advice and £200 for advice on the investment. The £800 is VATable (and yet derived from the product) and the £200 is not. For GABRIEL returns the amount of regulated income is not £1,000 but rather closer to £200. The implications and advantages of careful invoicing are clear.
    The other way of looking at it is to say don’t take the 0.5% and just charge the client £1,000 as a service fee. What is your regulated income then?
    There is also the vexed question of Invoice Date and accounting procedures. To say our “fee” is 0.5% of FUM begs the question of when is this fee payable (annually, monthly) and where is the client invoiced in this whole procedure (what is the tax date for these receipts)?
    I cannot understand how any firm can take money from a client without invoicing them! Bit difficult if the client pays monthly for an invoice already raised (CCL problems) but not in arrears. Mind you, if you take money from a client before you invoice them, there are problems there too!
    Just a few thoughts!

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