1. Adviser Charging and VAT
and other tax issues for the post-RDR world
PFS London - Crossing the RDR Rubicon

2. The Eastland 1912

3. Unintended Consequence on July
24th 1915

4. New Regulation - Lafollette's Seaman's Act was
signed into law on March 4, 1915
Passenger Deaths - 818
Passenger Deaths - 844

5. Unintended Tax Consequences
of Adviser Charging (AC)
• VAT
• Only two ways of getting money from a
product to facilitate AC
• Hijack the Premiums
• Surrender/Withdraw/Redeem – with tax consequences of
Action
• Facilitating charges from within tax
wrappers – client best interests

6. So what Changes?
• Pre – RDR • Post – RDR
– Tax Legislation – Tax Legislation
• VAT Act 1994 • Still VAT Act 1994
– Commission – Commission
• Was regarded as the proxy • Gone apart from Legacy
indicator for • We lose our proxy indicator
Intermediation for Intermediation
– Fees for Advice – Fees for Advice
• Often times VAT added – HMRC Guidance
mistakenly
• “predominant service”
– HMRC Guidance concept gone
• Relies on “predominant • Intention, perhaps, more
service” concept important
– But beware!

7. Important Principles
• The guidance must clearly reflect the legislation and legal precedents applying.
• An adviser acts as agent to the client and has a duty to act in the best interest of
the client under normal agency law. This is further reinforced by FSA rules. Since
this is the case, the adviser must ensure that a client is afforded the correct VAT
treatment of his adviser charge. He should not charge VAT just because it may be
easier and makes the business administratively simple. HMRC has no interest in
collecting a tax that is not legally payable.
• The guidance to the industry must be practical and must be subject to a clear test
that can be utilised by both adviser and HMRC in the determination of VAT
treatment.
• The word advice is utilised by other professions and there is a clear rationale for
the VAT treatment of advice being different for financial advisers than for say
accountants, tax professionals and solicitors.
• The VAT treatment of a supply must be capable of being determined up front
before the work is engaged on.

8. Exempt Financial Services
• In general, financial services are exempt from VAT
• Most important exemption is for intermediation
• A financial adviser will be supplying an exempt
intermediary service if (s)he
– brings together a person seeking an exempt financial
service with a provider of an exempt financial service
– stands between the parties and acts in an intermediary
capacity, and
– undertakes work of a specialised nature, preparatory to
the completion of a contract for the provision of financial
services, whether or not it is completed.

9. Regulated activities and the
permissions regime
The Regulated Activities Order (RAO) sets out which activities, in relation to which products are to be regulated.
The FSA packages the activities up into a permission regime and uses the regime in their Part IV authorisation for
firms. The Permissions for the purposes of this guidance can be divided into those that are fundamentally
intertwined with intermediation - i.e. the final link in the chain of bringing those who wish to acquire financial
products and those who wish to provide them, and those which involve some other activity which does not
involve arranging, dealing or otherwise executing acquisition of financial products.
It is the involvement in regulated activity which sets apart the Regulated Financial Adviser from any of the other
professions and the VAT treatment should be fundamentally driven from these permissions.
In order to operate as a Financial Adviser a number of regulatory permissions are required, particularly:
• Advising on Investments
• Arranging Investments
In order to be involved in regulated advice it must involve a personal recommendation. By the very nature of
being involved in regulated advice you are completing the intermediation chain. It is the way that the firm’s
permissions are being used that should form the genesis of the VAT treatment.
What Services does a Financial Adviser offer?:
Even though he/she may develop a financial plan, the object of the financial plan will be to recommend which
product types and which product providers customers are going to use to fulfil their plan.
If the supply depends on the use of advising on investments and arranging investments then it is clear that this is
part of intermediation and it is therefore exempt.

10. Six stages of the adviser’s role
If a financial adviser is providing a service that involves advising on and arranging retail
investment products, then the services are part of intermediation and are exempt from
VAT. In this context, advice covers a broad range of functions including primarily personal
recommendation, referral and intermediary work around product distribution.
1. Gather information about the customer;
2. Carry out research to find suitable investment options;
3. Provide the customer with reports, financial health-checks, forecasts;
4. Recommend specific investment products to the customer, including the prices
at which these can be arranged;
5. Act between the product provider(s) and the customer with a view to arranging
the sale of the Retail Investment Products agreed with the customer;
6. And, where applicable, i.e. where the customer agrees to an ongoing review
service, monitor the customer’s ongoing position to ensure that the products
continue to meet the requirements of the customer.

11. What’s in a name?
Financial Planner?
Wealth Manager?
Portfolio Services?
IFA?
Adviser?
Investment Manager?

12. HMRC Menu of Services
VAT Supply Description VAT liability
Execution only Buying or selling securities on a client’s instructions, but Exempt
without offering advice on the transaction.
Advice General financial or investment advice that is not Taxable
provided as part of a complete service that includes an
exempt financial service.
Intermediation Providing advice and acting between the client and the Exempt
or provider to arrange a contract for the provision of
‘Advised sales’ financial services, whether or not it is completed.
Discretionary (Portfolio) A securities-based asset management service, whereby Taxable
investment management the adviser on his own discretion takes decisions on the
purchase and sale of securities and implements those
decisions by buying and selling the securities, and
without obtaining prior instruction from the client.

13. Concept of the door remaining open to Arranging
In most cases the Adviser will be using both the permissions of Advising and
Arranging and therefore the supply is exempt as this is intermediation. This is also the
case even if the transaction agreed to fails.
Intermediation/Negotiation
Customers
Providers
Seeking
Seeking
Financial
customers
products
Advising on Arranging
Investments
FSA Permissions in use

14. When the door to arranging is closed or closes
• When the service is very clearly only ever involves the advice permission
and the service would never use the Arranging Permission. Examples of
this would be when the service clearly offers to provide a Financial Plan
but there is no requirement to arrange any product. This would not be
exempt. The door was never open.
• Where for some reason the intermediation process cannot be
completed e.g. the adviser decided as part of his advice that he is not
the best person to do the arranging. The door has now closed and the
supply is no longer exempt. The adviser may now set a new piece of
supply which will not be exempt e.g. when he recommends a
discretionary manager. The adviser in this case is now involved in
intermediating a service which is not itself exempt i.e. investment
management– the intermediation chain is broken. In this case the
discretionary manager is taking on the arranging and dealing role.

15. But a closed door may open….

16. Examples
There are numerous examples in the Professional Direction
The Vat treatment in these examples have been discussed with HMRC

17. The problem area – clients who do
not agree to complete a transaction
The client:
• Says thanks but no thanks
• Dies before a agreeing to go ahead
• Otherwise falls out of the process before
agreeing to the transaction of any product or
financial services
This is not uncommon in other industries – the VAT treatment set at outset can
be changed by the REALITY of what was consumed.
…………………………………………………………………………………………….Ask your printer

18. 3.13 What if my customer pays everything but the VAT?
If your customer refuses to pay the VAT charged, or you did not charge VAT when
the supplies were made but issued supplementary invoices to recover the VAT from
your customer, the claim to relief is limited to the VAT element of the total debt. For
example if you originally charged £100 which your customer paid, and you
unsuccessfully attempt to recover the £17.50 VAT charge originally omitted, you are
only entitled to claim the VAT fraction of £17.50 as bad debt relief.
2010/12: Retail Distribution Review (Adviser Charging) Instrument 2010
per hour We will tell you if you have to pay VAT.” “Lump sum We will confirm what
we will charge you in writing before beginning work … We will tell you if you have to
pay VAT.” “Reviews We will confirm what we will charge you in writing before
beginning work … We will tell you if you have to pay VAT

19. Practical Issues
• A standard form of assessment of the VAT treatment
should be utilised by advisers and kept as part of their
file record
• Advisers should set out in their engagement letter to
clients the VAT treatment of the supply that they are
about to propose to deliver
• Clients should be advised that if they do not agree take
up the recommendations, VAT may be charged
• If the client agrees to take up the recommendations
the service is exempt – even if the product sale is not
finally concluded

20. Other issues
• ACF – not always appropriate
• Broken ISAs
• Pensions
• Platforms/Wraps
• Regular savings vehicles

21. Where are we now?
• Guidance issued by HMRC
• Most of our work will be exempt
• Professional Direction by PFS
• However there are issues – surrounding
people who do not complete a product
transaction – HMRC have taken a position!

22. CONCLUSION
• Achieving the right VAT outcome should be
part of professional excellence.
• Clients who do not agree to a financial
services transaction will have to be invoiced
directly (outside ACF) for the VAT.
• As with all tax treatments - may be subject to
legal challenge
• There will be anomalies to figure out