Many financial advisers are still seeking clarification about the VAT treatment of their charges for advising and arranging a discretionary fund manager.
A key point to grasp is that the mechanism used to recover charges has no bearing on the overall VAT position. Introductory commissions paid for referrals prior to the RDR and adviser charges facilitated by the DFM can all potentially attract VAT.
Following implementation of the RDR financial advisers should apply an adviser charge for referring their clients to a DFM and other related services. This charge should be agreed with the client as early as possible, including any liability to pay VAT.
Often the adviser will continue to act for the client, including carrying out periodic reviews that examine the DFM’s performance and assess whether a change of strategy is required.
The financial adviser’s fee for recommending and arranging a DFM is taxable. The VAT exemption for ‘mediation’ does not apply, because discretionary investment management is a service and not a product. Obviously it is incumbent on the adviser to tell his client about liability to pay VAT as soon as possible.
To determine the VAT position, the financial adviser has to consider the precise nature of the service to be provided by the DFM.
A subtle difference to when the adviser decides to make his charge and the nature of the ongoing services can make a material difference to the application of VAT.
If the referral to the DFM is made with the view to the client making an investment in a fund and this is the predominant service, the adviser’s charge is probably exempt from VAT.
Units in a collective investment scheme are instruments included in HMRC’s list of qualifying products falling under the definition of mediation. If, however, the introduction is made with the view to the manager investing across several Oeics on a discretionary basis, the financial adviser’s charge is a taxable supply.
Helpfully, the judgement reached in the HMRC v Bloomsbury Wealth Management case last summer managed to clarify that a ‘rebalancing’ advisory service – when it is provided by the financial adviser – is classified as mediation and, as a consequence, is exempt from VAT.
The judgement concluded that a quarterly review service in relation to client’s portfolio of funds, which were arranged by a DFM as a result of a referral, was mediation and therefore the IFA’s related service is an exempt supply for VAT. Being an advisory service, the client had to accept the adviser’s recommendations and confirm his instructions to trade.
The Bloomsbury case demonstrates the complexity of determining the correct VAT treatment of adviser services. Despite HMRC’s attempts to allay concerns about the VAT treatment of fees charged by investment advisers following the introduction of RDR, the decision shows that the position is far from clear. It remains to be seen whether HMRC will appeal.
