More advice to be VAT exempt under latest HMRC rules

Guidance issued today by HMRC appears to extend the scope under which advice services will be exempt from VAT post-retail distribution review (RDR).

Under a new "gateway" principle, advice services will be deemed VAT exempt once the consumer enters the intermediation process, said HMRC in its revised draft guidance. 

The entry concept marks a shift away from the ‘intent' principle set out in its October guidance under which an intention to execute a sale would determine exemption. 

The latest draft rules suggest the overwhelming majority of adviser services will be exempt from the 20% sales tax.

HMRC stressed the key will be the ability of advisers to provide evidence the intermediation process has been entered into with the client.

This will normally involve the adviser conducting the following activities: carrying out a fact-find, researching suitable investment options, providing consumers with reports and financial health checks recommending specific investment products and finally arranging the sale of the product.

In a further departure from previous guidance, the revised rules suggest ongoing services could also be exempt from VAT.

In October, HMRC said where advisers charge separately for ongoing advice not involving the arrangement of a transaction the service will be VATable.

But the new rules say if the customer agrees to an ongoing review service after arrangement of a product sale this could also be VAT exempt.

"The VAT liability of ongoing services will depend upon the services the customer has agreed the adviser should perform," it said.

HMRC has also altered its stance towards discretionary management services. In its October guidance, it said where an adviser charges a fee for introducing a client to a discretionary fund manager to look after a portfolio the fee will be taxable.

But this reference to DFMs has been removed from the latest rules and HMRC is now preparing a new section within its VAT guidelines on discretionary investment management.

The deadline for responses to the redrafted rules is 13 February, after which a final set of rules will be published.