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The FSA and HMRC must address widespread confusion over when VAT is applicable to advice-giving post-RDR, industry experts argue.
Advisers and providers agree clarification is needed as fears grow consumers will be even less likely to pay a fee for advice if it is topped-up with VAT.
Present rules state customers incur no VAT charges on intermediary advice if they purchase a product. However advisers are unsure how those rules will translate post-RDR when charges for product selling and advising are separated.
Speaking at a live debate 'How will RDR affect you?', hosted by Legal & General (L&G), Informed Choice chief executive Nick Bamford, said: "It would be a good idea if HMRC and the FSA got together to make a statement on this as there is a lot of confusion over just when VAT will apply in the new fee structure."
L&G spokesman Mike Connolly says there is an assumption customers will pay VAT on all adviser meetings.
"A lot of the time people fail to realise the cost of advice," he says. "Commission-based charging often made people feel they were getting it for free.
"With the RDR people will not only feel they are suddenly paying for advice but are now paying VAT on top."
The HMRC's Notice 701/49 on finance says the focus is on what the IFA actually does for the consideration paid.
"For pure advice the consideration will be taxable," it reads. "If the IFA is acting as an intermediary between someone wanting and someone providing a financial product then it is possible the consideration will be exempt," it says.
But different VAT rules on advice-giving could mean lengthy conversations with the taxman for advisers when charges include a mix of pure advice and product selling.
"If it is a mixture of both the liability will depend on exactly what was been done and how," says HMRC.
Speaking at the debate, Danny Wynn, L&G's RDR and commercial director, said: "It looks like whenever a fee is charged the adviser's local VAT collector will have to come round, look at the paperwork, and decide which was the greater focus of the project, the financial advice or the implementation. At the moment this looks very complex."
In the FSA's June consultation paper FS 08/6, it says: "We do not expect the introduction of adviser charging to automatically change the tax status of adviser remuneration payments.
"Whether adviser charges are subject to VAT is not determined by who sets the charges or whether the payment is by fee or commission, but is determined by the nature of the service provided."
However it says it will discuss the RDR with HMRC before releasing it Policy Statement next year as it "recognises some firms are looking for more detail".
VAT is set at 15% until 31 December following a 2.5% cut last December by the Treasury to help ease recessionary pressures on UK businesses. From 1 January, the rate will return to 17.5% until further notice.
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FSA incompetence
As usual the FSA haven't looked at the ramifications of their proposals and the law of unintended consequences will rear its head. As the article states, people do not like to pay fees, and to add VAT on top will deter them even more from seeking help. Perhaps it's just another stealth tax?
Posted by: Dave Hedge
Chickens coming home to roost!
At last the real reason for the RDR more tax! Greedy Gordon has almost run out of things to tax so another 17.5% will obviously help to bail out the debt created by the banks. Only one problem though,the consumer won't pay it. No product-no fee twrms of business come to mind as a way round the fee. Have the FSA considered why the legal profession intoduced the no win ,no fee system? The public either can't or won't pay and off the back of a recession the disposable income is not available which will leave thousands of consumers with websites not advisers. What a business model eh? this will be as successful as Stakeholder pensions.
Posted by: Peter Taylor
RDR and history
Our prime minister secured a great deal for the UK, we got the EU foreign minister Baroness Ashton. France got Michel Barnier to control financial services regulation. What will apply in the UK will also apply in the other 26 countries. Why do people keep talking about RDR? Surely there is something more relevant to talk about?
Posted by: Ken Durkin
RDR
As the main reason behind RDR is VAT then surely VAT WILL be charged. We have to accept this as the country is skint. Once again the FSA is trying to push through ill-thought regulations with too many grey areas. The FSA's 'strapline' should be "I used to be indecisive, now I'm not so sure".
Posted by: Richard Hardy
what's changed
Care does need to be taken so as not to add further confusion - the HMRC guidance does not state that a product has to be bought for VAT not to apply but that intermediation was intended and where mixed services are to be given (advice and intermediation) which of these is the greater. here is the HMRC section – What is an exempt supply of intermediary services? A supplier of an exempt intermediary service is a person who: ■brings together a person seeking a financial service with a person who provides a financial service ■stands between the parties to a contract and acts in an intermediary capacity, and ■undertakes work preparatory to the completion of a contract for the provision of financial services, whether or not it is completed. Now because RDR is pushing forward the concept of fees people seem to be concentrating on the basis that this must mean VAT is payable, but it does not matter how advisers are renumerated but how much of the payment relates to advice and how much relates to intermediation, if advice is the greater chunk then VAT is chargeable if the advisory firm is VAT registered – this is the sitation now not only from 2013 but now as even if commision is paid the split needs to be determined - so where is the change to make this an RDR issue????
Posted by: John
RDR - Afghanistan
VAT - RDR - FSA? RDR is to the FSA what Afghanistan is to the US & the UK. They know how to get in but give no thought to its ongoing consequences or how to get out!
Posted by: Simon Mansell
John's comments
are correct as far as I am ware, i.e. the client does not have to buy the contract for intermediation to have taken place. Sorry i did not make that clear and may have given a different impression in my earlier post. Anyone who is not sure about what part of their work is POTENTIALLY vatable should go to HMRCs website where it is explained.
Posted by: Phil Castle
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Identify problems but suggest solutions
The FSA are very good at identifying problems AFTER they have occurred (The Structured Product review comes to mind). When will they actually get a bunch of IFAs in a room to "brainstorm" problems, potential solucitons and ideas BEFORE they start down a route based on good intentions (the RDR) when consequences and outcomes may be totally differrrent to the aims. My understanding of VAT is exactly as stated here "Whether adviser charges are subject to VAT is not determined by who sets the charges or whether the payment is by fee or commission, but is determined by the nature of the service provided." The problem will now become whow to clearly seperate the work which is vateable and that which is not. Currently the vast majority of my firms work leads to an implemented solution using a product, that may not always be the case.
Posted by: Phil Castle