Just when you thought it was safe to go back in the water…
It has been six years since advisers’ fears were allayed following a clarification of VAT rules on adviser charging. But, in the last couple of months, an adviser has fended off another attempt by HM Revenue & Customs (HMRC) to impose VAT on their fees.
Last year HMRC asked Birmingham-based Barnett Ravenscroft Wealth Management to pay back £160,000 on uncharged VAT on initial fees. It also refused the firm a £462,528 refund for VAT repayments on its ongoing fees.
New Model Adviser® understands HMRC has recently made similar requests with a couple of other advice firms.
In the end the Barnett Ravenscroft Wealth Management case resulted in HMRC backing down. Was HMRC eyeing up the millions in uncharged VAT on advisers fees? Or was it a mistake from the Revenue’s reading of the complicated rules that govern this area?
During a dialogue lasting months between the firm and HMRC, Barnett Ravenscroft used the intermediation argument from the 1994 VAT Act for the fees being exemptible.
The firm pointed to HMRC guidance regarding when an adviser ‘contacts the product provider(s) on their (customers’) behalf and acts between the providers and the customer with a view to arranging the sales of the retail investment product’. The firm said this service, and consequently other advice services such as cashflow modelling, suitability reports and fact-finds, are VAT exemptible.
But HMRC did not agree. Instead the Revenue referred to the HMRC guidance that starts from the point: ‘Is the business/person bringing together someone seeking a financial service with someone providing a financial service?’
Looking at Barnett Ravenscroft, the HMRC case worker said it was not bringing together someone seeking a financial service with someone providing them with one. This is because the platform does not provide the financial service, ‘rather they instruct a third party [i.e. fund manager] to do this’.
‘There is no VAT exemption for the introduction to a platform who then instructs a third party to buy/sell the actual investments,’ it said.
It is a small line but one that potentially could have sent shockwaves through the advice world with either IFAs taking a hit to incomes or fees increased by up to 20%.
In the end HMRC backed down. After further guidance was sought from HMRC, the officer ruled the relevant supplies provided by the advice firm were VAT exempt under the 1994 Act so a refund was allowed.
HMRC backed down in this case and it did not go to the Upper Tier Tribunal.
The guidance Barnett Ravenscroft was referring to followed the successful 2011 appeal against HMRC brought by Jason Butler (pictured above), then partner at London-based Bloomsbury Wealth Management, over a similar VAT case. However, HMRC said Barnett Ravenscroft could not rely on the Bloomsbury case (where HMRC also agreed to a VAT refund) because the case did not reach the Tribunal either.
Richard Wood, chief executive of Barnett Ravenscroft, told New Model Adviser® this was an important point. It means any advice firms challenged by HMRC in the future on VAT cannot rely on the Bloomsbury case either, meaning HMRC may look at individual firms again.
Butler said this new case was likely to have come about because of a lack of understanding of legislation by an HMRC case worker. It was not a deliberate effort to see VAT charged by advisers.
He said the issue with platforms providing intermediation was dealt with in his own 2011 case. But, as we have seen, HMRC did not regard itself as at all bound by that resolution.
Butler said: ‘If you read our ruling, the platform is merely a facilitator of the buying of funds and it doesn’t change the intermediation. It doesn’t change the supply,’ he said.
‘The platform is providing the facilities of custody and that was noted in our case. So it is quite clear the electronic means of holding the funds doesn’t change the nature of intermediation.’
Neil MacGillivray (pictured below), head of technical support at platform James Hay, said VAT rules were outdated. While the financial advice market has changed a lot in recent years, VAT legislation has not.
‘The clarity between what is and isn’t intermediation could do with considerably more guidance,’ he said.
‘It has had this exemption but the market has moved on and there are a number of stages where you possibly could challenge that. Is the existing legislation fit for purpose based on the changes with the introduction of platforms?’
When the VAT legislation was set up in the 1990s, advisers were selling mainly life insurance products and bonds,’ said MacGillivray. ‘But now the investments are all held on platforms, the rules need to be updated to reflect this.’
‘We get a lot of enquiries from advisers about whether they should be charging VAT on this,’ he said. ‘What they are essentially doing is guiding the client into what investments they should be in,’ he said.
‘If you have covered stage six in HMRC guidance [an ongoing review service], as part of your client agreement and it was part of intermediation, it is VAT free. But, bearing in mind the way modern platforms work, can that really be covered by intermediation? There is a grey area as to at what point [it is intermediation].’
The rules around VAT get more complicated for advisers when you add in acquisitions or advisers leaving firms and taking their clients with them.
Phil Young, managing director of consultancy Zero Support, said if an adviser moves to a different firm but continues to service clients, the intermediation exemption may be lost.
‘Suppose you leave your existing firm and set up down the road and take your clients with you. Fundamentally, if you don’t do another fact-find and don’t re-paper them, you haven’t gone through the intermediation gateway. In that case, HMRC have a shot at that one,’ he said.
David Penney (pictured below), director of London-based Penney, Ruddy & Winter, said he sought advice from the accountancy arm of Smith & Williamson to ensure his firm was wording things correctly.
‘Because it is so open to interpretation, if you ask 10 different advisers on this you will get 10 different answers,’ he said. ‘I wasn’t sure I understood it to the point of one day having an inspection and getting it wrong. So we paid Smith & Williamson to help.’
‘Most advisers now use some sort of centralised investment proposition. If that is a model portfolio service that looks just like a model that a DFM would run, it could be VAT chargeable. It has to be positioned as if we are setting this portfolio and running it individually for the client.’
VAT exemption for DFMs?
Another aspect of the issue is with discretionary fund managers (DFMs) and how the rules apply to their service.
The general consensus among most DFMs is that they do charge VAT and there is no exemption for them, according to Keith Edwards (pictured above), chief executive of DFM Casterbridge Wealth.
‘It comes up at the board meeting every two or three months. It will be discussed but we try to make sure our service is sufficient and the VAT is something we can’t really worry about at this time.’
However, one advice firm owner with a standalone DFM service is currently reviewing the firm’s position to see if it can get a VAT exemption for this. This owner, who did not wish to be named, said he was ‘80%’ sure he could.
It will be interesting to see how the firm’s bid for exemption plays out. Advisers should take particular note of Penney’s point about model portfolios and Young’s warning about acquired clients.
With HMRC regarding neither Bloomsbury’s nor Barnett Ravenscroft’s outcomes as binding, and with the intermediary role continuing to evolve, VAT still hangs over advice fees like the sword of Damocles.