VAT POST RDR

by David Baker Wealthtime

July 2011

Not only will financial advisers have to contend with the RDR changes to the way they do business in 2013, but it is also becoming increasingly clear that they will, in addition, have to contend with significant VAT changes as a result of RDR.

The VAT rules themselves are not changing but because RDR will abolish the concept of commission which is generally deemed to be VAT free at present, and replace it with fees which are not, with certain exceptions, generally VAT free. The whole approach to VAT and whether it is or is not payable on financial adviser’s charges to their clients will change. At present there is a grey area as far as WRAP platforms paying advisers with their clients’ agreement is concerned. Some financial advisers regard their charges as commission and so are not subject to VAT. Some charge fees, which are. However, the services provided in both cases can be pretty much the same. In addition, different VAT offices have different approaches.

After RDR there should hopefully be a more uniform approach by such offices. HMRC is currently looking at issuing guidelines for its own staff and the financial services industry, but it is asking for the industry’s input to this because, I believe, it is only now realising just how complicated it can be to work out how to interpret VAT rules in the context of the services provided by financial advisers and is not sure of the position in a wide range of situations itself. This is not surprising because it can be extremely complex.

The fundamental question is down to what exactly is being done by the financial adviser. The basic issue is, is it intermediation or advice that is being provided? The former is not vatable, the latter is. Intermediation includes negotiation so if advice plus negotiation leads to a transaction being completed, that can usually be taken as a whole and classed as intermediation so the charge for this process would not be vatable.

Another question to ask is which is the dominant element in the process? This could be affected by extraneous circumstances such as whether the financial adviser has an ongoing relationship with the client – ie if there are annual meetings to consider the client’s investments, and his ongoing needs, and financial health checks for example, none of these may necessarily lead directly to any transactions being undertaken at the time, so on the face of it this may be advice for which the charge would be vatable, but if it is also associated with transactions being undertaken between such meetings as part of the overall service, then it may not be. But should one look at the overall service or attempt to split it into it’s component parts? That debate has not yet been resolved.

But is it even practical to split and charge separately for the advice and intermediation – at present the charging basis for everything the financial adviser does is often a set percentage of the client’s fund. Can that continue if the two aspects of the financial advisers work need to be separated for VAT purposes? If separate charging arrangements are necessary this will create more complex accounting procedures than hitherto which could lead to the need for new, more sophisticated accounting software. Another concern is, given that there have been different interpretations of the current position across the industry, will VAT inspectors revisit old VAT returns after RDR?

Clear and straight forward guidance from HMRC is essential to avoid confusion after RDR, but given the multi-faceted nature of some of the transactions undertaken, in the sense of some of the component parts being vatable and some not, and given the whole may sometimes be undertaken, in this electronic age, at the touch of a button, this is going to be an enormous task to achieve. The ABI has produced a flow chart which should be of some help but they are not the final arbiters between what is advice and what is intermediation and when/if a transaction needs to be split into its component parts to determine what parts are chargeable to VAT. Much confusion has and will continue to occur over this. It is to be hoped that HMRC will do their best to minimise this and adopt a reasonable approach to the inevitable errors. 


This article represents the personal views of David Baker and is not intended as a substitute for professional financial advice.


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