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What’s what with VAT

The first in a short series covering VAT and financial services

The concept of advisercharging, introduced under the RDR, makes the whole question of VAT in relation to remuneration received by financial advisers, regardless of how they receive it, even more relevant.

The issues in relation to adviser remuneration that the joint HM Revenue & Customs/Association of British Insurers’ guidance note addresses are, however, substantially issues that have been relevant for some time and not just relevant in the future when the RDR is fully implemented.

The question of whether or not VAT is payable in relation to financial advice and the arrangement of financial products (known as intermediation for VAT purposes) has been one that has been debated for some time.

There is evidence that there has been some confusion and misconception in some parts of the market on this important matter.

Because the vast majority (if not all) of the remuneration of financial advisers has historically been made up of commission and other payments from the provider of the financial product bought by the client, there seems to have emerged the widely held (but potentially misleading) view that if the payment for the service provided to the client is made by the insurance company or fund group, it is VAT-exempt. In other words, exemption was determined by virtue of the payment being made by the provider as commission.

While, as a matter of fact, such payments may well be legitimately VAT-exempt, it is not how they are paid or who they are paid by that is the determinant. The determinant of the VAT exemption is what the payment is made for.

The latest guidance makes it clear that the provision of intermediary services for arranging most financial and insurance products is exempt from VAT.

The latest guidance makes it clear that the provision of intermediary services for arranging most financial and insurance products is exempt from VAT

The intermediary service should contain three principal elements:

  • bringing together a party seeking a financial service with a party that provides such a financial service;
  • acting between those parties; and
  • undertaking work in preparation for the completion of a contract for the provision of financial services

The service of arranging life, pensions and investment products and mortgage loans (intermediation) is therefore exempt from VAT, an exempt supply. This exemption applies regardless of whether remuneration for the service takes the form of fees or commission.

The importance of what the adviser payment is made for is stressed throughout the flow diagrams, accompanying guidance notes and the helpful FAQs forming part of the HMRC/ABI guidance.

Each of the first two flow diagrams (diagrams A and B) include a payment for an initial up-front service and each seek to establish “early on in the flow” whether the payment in question is made for financial advice only.

Flow diagram A contemplates arrangements where the payment to the adviser is made wholly or partly through product commission. Flow diagrams B and C deal with arrangements where the adviser is paid wholly through advisercharging, that is, not commission.

If the payment to the adviser is not conditional on a product being purchased and is entirely unrelated to the provision of a financial product – even if one is actually bought as a result of the advice – then the payment will clearly be a VATable supply as it will not be made for the arrangement of a financial product.

Importantly, it is made clear that this will be the case whether the payment is made wholly or partly through product commission (of course, a product must be bought for this to be relevant) or through adviser charging.

Next week, I will look at the principles to keep in mind in regard to the VAT treatment of payments made for ongoing service only and also introduce the concept of predominant supply to determine the treatment of a “payment made (however it is made) for both advice and the arranging of a financial product”.


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