HMRC details how VAT will be calculated on financial adviser services

Out-Law News | 18 Oct 2012 | 3:55 pm | 3 min. read

Advisers that provide ongoing services to their investment clients will generally incur VAT charges for providing those services, according to new comments made by HM Revenue & Customs (HMRC).

VAT will generally be charged on those adviser services that are provided on an ongoing basis rather than periodically, it said.

Guidance published by HMRC had previously referred to periodic services as 'ongoing services' and suggested that, in some circumstances, those 'ongoing services' would not be subject to VAT. This caused confusion in the industry as many understood the reference to 'ongoing services' to mean that the provision of non-periodic review services and management services by advisers would escape tax liability. However, HMRC has now said that will generally not be the case, refuting suggestions that its guidance on the issue had changed.

"HMRC’s guidance uses the term ‘ongoing services’ because this is consistent with how the FSA describes them for RDR purposes but what we are referring to here are the periodic review services typically provided by an IFA (independent financial advisers) after he/she has arranged a portfolio of investments for their clients," a spokesman for HMRC said in a statement.

"These review services will only be exempt if they are either agreed at the time the customer initially engages with the IFA and form an ancillary part of the supply of exempt intermediation or (as outlined in our guidance) qualify for exemption in their own right because the client is looking to increase/amend their portfolio and the IFA arranges those transactions for them – any other periodic review services will be taxable," they added.

"Services which are provided on an ongoing (rather than periodic) basis are unlikely to qualify for exemption because such services will almost certainly be some form of portfolio management service rather than intermediation and, regardless of who provides them, will be a single composite taxable supply," the spokesperson said.

In its latest comments HMRC also outlined how the way advisers agree to provide periodic review services to clients, the time that agreement is formed, and the nature of the review service itself would determine whether those services were VAT-able.

In circumstances where investors purchase review services alongside financial products that are themselves exempt from VAT charges, the provision of those review services will not be subject to VAT as long as the services only form a "minor" part of the combined product and review service package purchased, it said.

"The services of an IFA signing up a client to a periodic review service at the time the client buys their exempt financial products will be an ancillary part of the exempt supply of intermediation," the HMRC spokesman said. "This is conditional, however, on the periodic review service being a relatively minor element of the overall supply in terms of both what is provided and what is charged for it - if it's not, we may see the review service as being the principal supply and not the intermediation."

In circumstances where review services are not bought by clients as part of a bundled package, the amount of VAT that will be due for those review services will depend on "the nature of the services being supplied," HMRC said. If advisers charge their clients separately for a one-off review then VAT will be payable simply on that service if the nature of the service is one which is subject to VAT. If advisers charge clients on an ongoing, rather than periodic, basis for ongoing portfolio review and management services then VAT will be calculated on consideration of that total service supply instead, according to HMRC's latest comments.

Determining when advisers incur VAT on their services is important under new rules being introduced by the Financial Services Authority (FSA). Under its Retail Distribution Review (RDR) independent advisers can only be remunerated through charges they levy to their client investors for the advice and related service they provide on investments. The charges must be agreed on by the clients prior to the provision of that advice or service.

Under existing arrangements financial advisers are permitted to receive payment from financial product providers and other stakeholders in the retail investment market, such as platform providers and fund managers, for choosing their products or services.

However, the FSA decided to crackdown on such arrangements after determining that there was a risk of "bias" in the market and that the arrangements were not transparent enough to allow investors to understand the charges they may face.