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A firm of independent financial advisers has charged a fee of £9,000 plus VAT in respect of services carried out for one of our clients. The services and attributed fees were:
(i) Research, guidance, recommendations, issue of reports in respect of taking benefits from existing pension funds (involving some £600,000 with 20 plus policies and various companies): £7,000 + VAT.
A firm of independent financial advisers has charged a fee of £9,000 plus VAT in respect of services carried out for one of our clients. The services and attributed fees were:
(i) Research, guidance, recommendations, issue of reports in respect of taking benefits from existing pension funds (involving some £600,000 with 20 plus policies and various companies): £7,000 + VAT.
(ii) Deployment of capital in new investments arising on maturity of insurances (£300,000) and lump sums on pensions (£200,000) referred to in (i). The investments comprised unit trusts, venture capital trusts, but not insurance: £1,000 + VAT.
(iii) Analysing personal equity plan holdings (£100,000): £200 + VAT.
(iv) Inheritance tax mitigation: consideration is still being given to insurance contract and equity release scheme and they have yet to be implemented: £800 + VAT.
All commissions were rebated by enhancement of the products in which the client invested. In pending items, commission will also be rebated.
Where an insurance policy is arranged, and a fee is agreed instead of a commission, I understand that the fee would be exempt for VAT purposes under item 4 of Group 2 of Schedule 9 to the VAT Act 1994.
Please would readers advise whether VAT is correctly levied on all the items described above and, if exemption applies, under which provisions, as it seems unfair that VAT is imposed on a fee whereas an agreed commission on investments as an alternative would be VAT free.
(Query T15,981) - VSS.
The problem is, of course, that the services described in the query are all in the nature of standard-rated advice and have not been arranged as agency services. Acting as an intermediary in arranging for a supply of insurance is indeed exempt under item 4 of Group 2. Mind you, the exemption is complicated considerably by the elaborate definitions of the services of an insurance intermediary and of acting in intermediary capacity, but there is little doubt that commissions for any assurance arranged in this case will have qualified for exemption. However, to the extent that service concerned advice on annuities, etc., it sounds as if it had nothing to do with assurance.
Also, at least some of the intermediaries' services sound as if they related to finance transactions, not assurance or insurance, and would have to qualify for exemption under item 5 of Group 5 of Schedule 9. Again, there is an elaborate set of notes, but the exemption is likely to have applied.
The problem is therefore in part the accountancy and in part the nature of the agreement with the financial advisers. The latter may well have so arranged matters as to ensure that they charged standard-rated fees because they preferred to have taxable outputs rather than exempt ones. Since, rather than reduce their standard-rated fees to the extent of the exempt commissions received, the advisers seem to have arranged to forgo their commissions, thus allowing the value of the investments to be increased, I suspect that there is little which can now be done about the situation. If he or she wanted to pay less VAT rather than get a bigger investment product, the client should have got the fine print altered!
An adviser's fee can be treated as exempt to the extent that it is reduced by a rebate equivalent to the commission received, although Tax Guide 1/02 VAT: Insurance Commission and Similar Fees, an agreed guidance note issued in February 2002 by the Tax Faculty of the ICAEW, says that the client must consent to the retention of the commission.
The only possible argument I can see is that the advisers charged a commission for arranging the assurance or the investments, even though it was described as an advice fee. The initial reaction of all concerned is likely to be that there was only one commission and that it was rebated. However, I do not see why an adviser could not charge a commission both to a supplier and a customer. Of course, I do not know what the regulatory rules are but, having given up the commission from the supplier, surely the adviser could agree to charge one to the customer? A commission could be a fixed amount rather than based on the value involved. Obvious problems include that the wording of the contract probably says no such thing and that at least part of the service was indeed consultancy advice rather than acting as an intermediary. - A St John Price.
The VAT exemption under item 4 of Group 2 of Schedule 9 to the Value Added Tax Act 1994 applies to an intermediary (who may act for the insured, insurer or both) 'making arrangements'. 'VSS' is correct to state that where an insurance policy is arranged and a fee is agreed it is exempt. However, in the list of services provided there appear to be no arrangements made and thus the exemption cannot apply. There is a considerable amount of advice on matters arising but none on making arrangements. This advice has to be standard rated just as it would be if given by an appropriately authorised accountant.
The position is similar as regards securities transactions under item 5 of Group 5 of Schedule 9 and exemption is only available to the making of arrangements. Arrangements were made for the new investments acquired from the seller in (ii) of the list and the exempt commission from the seller due to the independent financial adviser has been used to enhance the value of the products. The services billed are basically general financial or investment advice and not covered by the exemption. VAT appears to be correctly levied, as the exemption is restricted to the making of arrangements and does not extend to more general advice. - R.N.G.
