IFAs and VAT

It used to be the case that whenever I met an independent financial adviser (“IFA”), he or she would be keen to tell me that my services were of no relevance to their business whatsoever. Lately I have found that they have some detailed questions to ask. Indeed, some have become clients. Is there any particular reason for this change between IFAs and VAT?

The change relates more to the perceptions of many IFAs rather than anything in the VAT regulations. Following the Retail Distribution Review (“RDR”), IFAs have had to move from receiving commissions to receiving fees in respect of “Retail Investment Products”, as defined by what was then the FSA. The name given to how a business is paid for its services has never had any importance for VAT purposes; what matters is what the business does for the consideration it receives. Nonetheless, many IFAs in the past tended to work on the basis that commissions were VAT exempt and advice was taxable. The changes introduced by the RDR have made most IFAs much more conscious of the need to understand when their services could fall subject to VAT.

When are the services of an IFA VAT exempt?

An IFA’s services will be VAT exempt when they act as an intermediary in relation to a VAT exempt financial service. That means they must tick the following three boxes in relation to any given service:

They must bring together a person who wants to buy a VAT exempt financial product and a person who is able to provide that product;
They must act as a go-between for the parties; and
They must undertake work preparatory to the completion of a contract for the provision of the financial product.

Preparatory work includes the completion, or assistance in the completion, of application forms and making representations on behalf of the parties to a contract. The IFA’s services are still exempt even if the contract is not completed.

When are the services of an IFA taxable?

There is no VAT exemption for pure advisory services. This includes the situation where an IFA provides generic advice rather than advice relating to a specific financial product. Take a client who wants a mortgage. Whilst knowing that many lenders will not deal with intermediaries, the client wants his IFA to advise on which lender to approach. If the remuneration received for such advice exceeds the VAT registration limit (currently £81,000 in any rolling 12 month-period) the IFA must apply to register for VAT.

An IFA that registers is likely to be partly exempt because they will probably still be providing exempt intermediary services as well as taxable advice. Being partly exempt means that the IFA is unlikely to recover all their input tax. They must apportion the input tax incurred on their general overheads, either by using the standard method (based on turnover) or by using a special method approved by HMRC. Exempt input tax may be recovered if it is de minimis; this is unlikely ever to apply to an IFA because to be de minimis exempt input tax must amount to less than 50% of total input tax. This, combined with the complexities of partial exemption, is likely to make voluntary registration unattractive for many IFAs.

Areas of difficulty

The most common area of difficulty relates to situations where a service involves a mixture of pure advice and (horrible word) intermediation. If the taxable element predominates, then the whole service becomes taxable and vice versa (see Notice 701/49 for examples provided by HMRC).

The VAT liability of fees for managing an investment portfolio is also a highly complex area where specialist VAT advice should be sought.

About Terry Dockley

Terry Dockley is a Fellow of the Chartered Institute of Taxation and has been advising on VAT for over 25 years. He joined the Inland Revenue in 1977 as a direct entrant inspector, leaving in 1985 to join Deloitte, Haskins & Sells, which later became part of PwC. He has run his own VAT advisory practice since January 2011.

Terry advises businesses and charities on VAT when it gets more complex, often working closely with other professionals, such as lawyers and accountants. Terry also keeps bees and has four children and four Burmese cats.

If you need more advice on any other VAT issues, please contact Terry Dockley & Co who take the sting out of VAT!