Finally, some clarity in the VAT confusion

HMRC is expected to outline how VAT will apply alongside adviser charging next week. But what should advisers watch out for?

Rules surrounding VAT and adviser charging have been causing plenty of headaches for advisers recently.

Under existing HMRC rules, professional advice where no product application is made is subject to VAT, while financial services ‘intermediation’
is exempt.

But a lack of clarity over what constitutes advice and intermediation – and what this means for ongoing charges - has been a source of confusion for advisers. So what is HMRC likely to say?

Intention

One of the key clarifications in the guidance is expected to include the word ‘intention’. HMRC is likely to state that, where advice is given with the intention of arranging a product sale, it will be exempt from the 20% sales tax.

The fresh emphasis on ‘intent’ marks a move away from the existing principle of establishing which is predominant - advice or intermediation.

Engage Partnership co-founder and director Les Cantlay, who has been chairing key meetings between HMRC and trade bodies on the issue, said it will not be necessary for advisers to arrange a product sale for the advice to be VAT-exempt, but to simply set out the intention of doing so.

The use of an engagement letter setting out the likelihood at outset that advice will lead to a product sale will be key, said Cantlay.

Circumstances where IFAs issue advice with no intention of product arrangement are very rare, he said.

Ongoing advice

Some advisers are concerned ‘ongoing’ advice – including services such as portfolio rebalancing – may not be deemed intermediation and will, therefore, be VAT-able. 
Cantlay expects ongoing advice will be exempt from VAT when HMRC issues guidance at the end of the month.

“I expect one of the key things HMRC will say is ongoing adviser charging will be intermediation and therefore exempt from VAT,” he said. “This is because the likelihood is units are being sold or bought, products are being changed - so it’s still intermediation.”

But he said advisers would need to demonstrate the value of their ongoing service. 
“If you continue to charge and never change anything, it would be very clear you were doing some sort of odd loophole.”

Discretionary managers

Cantlay said where IFAs recommend clients to discretionary portfolio managers, it is unlikely the advice will be VAT exempt because they would have “given up their right” to intermediate and arrange a product.