In February 2003 HMRC issued guidance notes on the ‘clarification of VAT treatment of services by financial services’. These expanded the advice already issued under Public Notice 701/49 Financial securities.

There has been no significant change in this area from a VAT perspective, but what has changed, and will change more in 2013, post RDR, is the adviser remuneration model.

VAT principles:

VAT is a tax applicable to the supply of goods and services within the UK. To analyse the VAT status of any transaction it is necessary to identify:

• who is the supplier
• who is the customer
• what is the nature of service being supplied.

The key point is that it is the nature of the service being supplied which impacts the VAT classification. Whether the payment is made as a fee or via commission – initial or trail, has no bearing on the VAT analysis.

Services supplied by financial advisers are either exempt or chargeable at the UK standard rate of 20%. Services are only exempt if they fall within the various categories of exemptions as set out in the legislation. Specifically, Schedule 9 of the VAT Act 1994 sets out two exemptions to services supplied by financial advisers – Group 2 Insurance and Group 5 Finance.

- Insurance exemption includes life and pension business (as well as other business lines).
- Finance exemptions relate to investment (UT/OEIC) and ISA business (as well as other business lines).

Advice only

Supplying advice is taxable. So, for providing a holistic report, reviewing current arrangements or investment advice, VAT would be due.

Intermediary service – to act and facilitate a purchase of financial product

Principally this is exempt from VAT (no matter how it is paid) subject to the service containing three elements:

• Bringing together a party seeking a financial service with a party providing financial services.
• Acting between those parties.
• Undertaking preparatory work* to the completion of a contract for the provision of financial services.

Mixture of both advice and intermediation

Principally, whichever element is the predominant service will indicate whether VAT is due or not.

Consider these examples:

Client A - upon receiving advice then purchases a financial or insurance product. Both elements are present. Where the advice directly results in the customer taking out a contract and you meet all of the criteria highlighted above, the whole service, including advice element, should be exempt from VAT.

Client B - requires a full financial health check, review of existing arrangement, and advice across a range of areas and only requires changes to existing contracts and minimal intermediation on buying an advised contract. In this case it is likely that the whole service provided is subject to VAT.

The predominant service in any supply is a question of fact and cannot be chosen to achieve best result from a VAT perspective.

If you supply each service independently, then each will attract its own VAT status as previously described.

Skandia cannot address individual VAT issues or decide whether one service is more predominant than another. You should seek independent advice from your own tax advisers or individual rulings from your own VAT inspector on how the services you provide should be treated for the purposes of VAT.

*For insurance and transactions in securities preparatory work is not required.