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Topics: | legal & general| HMRC| ABI
Advisers are being discouraged from charging separately for advising and arranging in a bid to avoid confusion over VAT, as it will lead to higher costs for consumers.
Legal & General (L&G) distribution director, Danny Wynn, says some fee-charging firms have already begun splitting their charges to ensure clients and HMRC are aware which parts of the service are liable for the tax.
But Russell Warwick, distribution strategy director at Prudential UK, warns this would mean some customers are unnecessarily charged VAT, which is set to jump from 17.5% to 20% next January.
Joint guidance issued last week by HMRC and the ABI attempted to clarify the VAT liability of advisers’ remuneration.
Advice only is taxable, it confirmed, while arranging the purchase of a financial product is exempt. Where clients receive both services, the “predominant” one determines the VAT liability.
However, possible confusion over which service outweighs the other has swayed some businesses toward the “safety net” of separating their charges for the benefit of the taxman.
L&G’s Wynn says this approach has already been adopted by some firms. “We are seeing advisers split the charge,” he says. “It is a sound and pragmatic solution that would also help avoid a retrospective VAT decision by HMRC.”
Prudential’s Warwick says he sympathises with this as a “protective measure”, but warns it will lead to higher charges for clients.
He says while a case that is predominantly arranging would be exempt from VAT, splitting the cost would mean at least part of the bill would be VAT liable.
“I have some sympathy with any move toward the safety net of splitting the charges, but that could mean extra charges for clients and that can never be a good thing.”
Barry Horner, chief executive of Paradigm Norton Financial Planning, says he believes some advisers will be tempted to separate the cost of the services.
“The last thing advisers want is to receive a letter from HMRC some time after the event saying we should have been charging VAT when we did not,” he says. “That would not be a very nice letter for clients to receive.”
A more prevalent problem, according to Wynn, could lie in different regional interpretations of which is the “predominant” service.
“A lot of it will be down to the interpretation of the tax inspector,” he says. “Consistency is key. It would be a travesty if in one part of the country a case is deemed VAT exempt, and in another it is not.”
Warwick argues HMRC may need to conduct further work to ensure the dominant service is established in a consistent manner by the tax authorities.
“This piece of work by HMRC and ABI is very good, but we may need a better understanding of how we can establish one predominant service over another.”
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A challenge for advisers, not providers
As we get closer to 2012, the opinions of old-world life assurance companies when it comes to things like pricing and business strategy become less relevant by the day. Where they do have an opinion, it often sounds like a desperate attempt to maintain 'control' over adviser remuneration and the distribution of their products. The reality is, clearly defining the cost of your advice and cost of implementation does not result in higher costs to the client. What it does result in is clarity, truly impartial advice and generally lower total charges than the equivalent commission payment. VAT is a price paid by the clients of professional advisers. If you are able to articulate your value, the movement from VAT at 17.5% to VAT at 20% is about as irrelevant as the opinion of a product provider.
Posted by: Martin Bamford
Spot on Dennis
Once again Dennis has hit the nail on the head. It is significantly easier to administer VAT by splitting adivce and implementation than it is to work out whether advice or prouct sale has been the predominant service. What if HMRC don't agree with your interpretation? I fail to see how a client won't be able to understand: "I charge for advice and implementation separately. My advice fee attracts VAT, my implementation fee does not."
Posted by: Huw Jones
Review your services
If you are providing Financial Planning then splitting your SERVICES is the way to go. Financial Planning is not regulated, so by definition cannot be exempt, as there are no products involved to which exemption could apply. Regulated investment services and associated advice are exempt. Seeeempuls!!
Posted by: Mijke Stafford
Separating advice from product sales
I have to agree with Mike Stafford on this one. We have a separate company that gives generic advice on a fee only basis, so our USP is that we can be completely unbiased, as the company does not receive commission. It is also unregulated (but a member of the IFP). My separate IFA business which is FSA direct receives both commission and fees, and can therefore legitimately not charge VAT as it only deals with the sale of products, including the implementation of advice given by the Financial Planning company. Incidentally, it is quite legitimate for the IFA business to pay introducer commission to the Financial Planning company, which has all sorts of advantages. You might think this is a new idea - well we have been running the two businesses like this since 1994!
Posted by: Jason Ball
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As usual...
As usual Ye Olde Worlde Life Company weighs in with a headline article that is as much use as a chocolate teapot. What's the point of turning up late to the debate and then spouting off that splitting charges may lead to clients being charged more? What's the alternative, where's your solution? Have you considered the other alternative that we spend an extra couple of hours on each case determining which elements were Vatable and which weren't - and billing the client for the time taken to work it out - believe me, having done it, it's not that simple. the other alternative is even worse, getting it wrong and ending up owing HMRC - and then trying to go back to said clients and recovering the VAT. Splitting the charge and working out the dominant service in each element of the work is the best approach I have been able to come up with. It is fair, consistent and saves a lot of time. Would the man from the Pru kindly not go for an attention grabbing headline with no substance, and instead add some value to the debate.
Posted by: Dennis Hall