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VAT & Financial Advice

Cherry ReynardCherry Reynard offers a series of business briefings, looking at some of the key ways advisers can improve their business proposition, whether through generating referrals, making effective use of social media or building professional connections.

The rules on whether financial advice should be subject to VAT remain complicated. Although the sale of a financial product is not VAT-able if it is paid for via commission, financial advice is chargeable, creating problems for advisers whose business is transitioning from advisory to fee-based. 

  • Guidance from HMRC says that it is sufficient for an adviser to provide a “gateway” to the implementation of a product recommendation
  • Although ongoing advice is VAT-able, it may be exempt if the client agrees to the service in advance
  • Financial advice is not exempt from VAT, and this is unlikely to change

HMRC has pronounced further on whether advice should be subject to VAT post-RDR. Cherry Reynard considers the implications of this latest guidance and offers some thoughts on dealing with cases that remain unclear.

HM Revenue & Customs has taken some time to answer fully the question of whether advisers need to charge VAT in the wake of the Retail Distribution Review (RDR). Further clarification was issued in February but, while it brings advisers one step closer to an understanding of their obligations from January 2013, the rules are still complicated.

The problem has centred on the fact that the sale of a financial product that is paid for through commission is not chargeable to VAT. As, up to now, this has been the bread-and-butter of most advisory businesses, the majority did not have to get involved in the thorny business of becoming VAT-registered and submitting quarterly VAT returns.

Financial advice, on the other hand, is chargeable to VAT and so, in transitioning an advisory business to a fee-based practice, advisers would have to take steps to ensure VAT is charged and passed on to clients. Yes, that may seem counterintuitive, given the FCA is trying to encourage advice rather than product-selling, but then the FCA has no sway over VAT rules.

The latest - draft - guidance has said it is enough for the adviser to provide a “gateway” into the implementation of a product recommendation. The sale does not actually have to be concluded – so long as the adviser can provide evidence that the customer agreed to the arrangement of a retail investment product and the adviser performed those services.

Under the guidance issued last October, ongoing advice – including annual reviews – was said to be liable for VAT. The new guidance says that this may be exempt, however, if the client agrees in advance for these services to be carried out. In practice, the VAT liability will depend on the nature of these services.

The latest guidance certainly does not make financial advice exempt from VAT – nor is future guidance likely to do so. The Institute of Financial Planning has warned that advisers need to be careful if they are marketing themselves as providers of holistic advice but then not charging VAT because there is a product recommendation at the end. However, for some advisers, the guidance may at least bring the amount of their business that is ‘VATable’ under the registration threshold, which for the 2011/12 tax year was £73,000.

Tax accountants recommend that, in case of any uncertainty, advisers split their costs into ‘exempt’ and ‘VATable’. For example, the annual portfolio management charge could be split into a ‘rebalancing’ fee and a ‘management’ fee. Those charges that are liable for tax and those that are exempt need to be clearly identified. Ultimately, the situation is likely to become clearer with time, but the consequences of getting it wrong are severe. If there is significant doubt, then it is worth seeking the guidance of a professional.

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