VAT exemption for financial advice

The FSA have introduced changes in the way in which financial services businesses generate their income and as a result have introduced The Retail Distribution Review (RDR), which requires advisers to move from receiving commissions to fees agreed with customers. Where advisers can evidence the arrangement of a Retail Investment Product for a customer their services will be exempt from VAT.  Evidence is crucial to the verification of exempt supplies.

HMRC’s proposed guidance provides some clarity to the confusion which has reigned for the past few months.

Investment advisers are however, still faced with applying the circumstances of their business to determine the correct VAT liability.

HMRC consider there are six possible services being supplied which are:

  • Gather information about the customer;
  • Carry out research to find suitable investment options;
  • Provide the customer with reports, forecasts and financial health checks;
  • Recommend specific products and discuss prices at which they can be arranged;
  • Act between the product provider and the customer with a view to arranging the sale of the Retail Investment Products agreed with the customer;
  • Review and monitor the continuing needs of the customer where agreed.

HMRC consider that all the services above will be exempt from VAT where they are within the agreement concluded with the customer and importantly where the adviser performs the services outlined in 5 above AND retains evidence that they have performed that service. If no evidence is retained by the adviser the services will be standard rated. In addition, where any of the services are contracted for separately they will be considered liable to VAT at the standard rate.

The VAT liability will depend upon what is done – not the fee arrangement.

To exempt their services, an adviser will need to keep sufficient evidence to support the VAT treatment applied to the services. The evidence will need to be specific to the services performed for the customer and demonstrate that the adviser acted between the customer and the product provider with a view to arranging Retail Investment Products.

Retail Investment Products as defined by the FSA are:

  • A life policy;
  • A unit;
  • A stakeholder pension scheme;
  • A personal pension scheme;
  • An interest in an investment trust savings scheme;
  • A security in an investment trust;
  • Any other designated investment which offers exposure to underlying financial assets , in a packaged form which modifies that exposure when compared with a direct holding in the financial asset;
  • A structured capital at risk product.

Financial advisers should ensure their contracts are properly drafted and their services evidenced to take advantage of the VAT exemption offered.

HMRC’s published guidance is expected soon. In the meantime,please contact TaxDesk on 0845 4900 509 and ask for Vaughn Chown to discuss the VAT implications.